The Power of Compound Interest

What are the two words that every investor loves to hear? Compound. Interest.

Unlike simple interest, which is calculated only on the principle (amount of money you put in), compound interest accrues on the principle and your previously-earned interest. To put it simply, compound interest allows you to gain interest on your interest, thus creating a “snowball” affect with your money.

Some retirement accounts, such as Roth IRAs, allow you to earn compound interest on your investments. This makes it absolutely vital to start investing as early as possible in order to maximize your nest egg. No matter what stage of life you are in, the best time to start saving for retirement is now.

You may think that you don’t earn enough money to make a significant impact, but you are wrong. The amount of capital you start with is not nearly as important as when you start. Every year you push off investing can really hurt you in the long run.

To illustrate the power of compound interest, let’s take a look at two different investors: Ashley and Bill:

• Ashley opens her retirement account at the age of 25, and saves $5,000 every year through age 35. Her total contributions equal $50,000.
• Bill waits until age 35 to open his retirement account, but contributes $5,000 annually until age 65. His total contributions equal $150,000.

Now, who do you think ends up with more money by the time they both reach age 65? Assuming both earn a steady 7% return rate, here is what they end up with:

• Ashley’s final balance is $602,070.
• Bill’s final balance is $540,741.

Despite investing three times as much money as Ashley, Bill still ends up with less money because he waited longer to get started. This simple example illustrates not just the power of compound interest, but also why it is so important to start saving early.

Don’t wait any longer – speak with a financial advisor today about retirement. The consultants at American Investment Planners, LLC offer professional retirement planning services to individuals of all ages. Please call (516) 932-5130 to schedule an appointment with one of our advisors, or email info@americaninvestmentplanners.com.