The Magic Of Compound Interest

Here's a topic we've addressed before. It is a topic worth repeating. I took the simple explanation directly from the U.S. Department of Labor, Employee Benefits Security Administration.

Compounding investment earnings is what can make even small investments become large investments given enough time.

How It Works – The money you save (either in a savings account, a mutual funds or in individual stocks) earns interest. Then you earn interest on the money you originally save, plus on the interest you've accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.

Start Saving Early - For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.

Starting at 20 - If you put $1,000 a year into an IRA every year from age 20 through age 30 (for 11 years) and stop - and the account earns seven percent annually - your savings will equal $168,514 at age 65.

Starting at age 30 - If you don't start until age 30, but save the same $1,000 amount annually but for 35 years straight at the same seven percent rate, you will have saved three times as much money but your account will grow to only $147,913 at age 65.

Where you might obtain a steady 7% return puzzles me, especially in this low interest rate environment but the point is clear even on a lesser scale:
- Start early!
- Save regularly or automatically!

The difference is significant if you wait. Even small amounts saved early have many more years to grow.

Be $ Smart - Start saving now! Any amount is better than none. Your future depends on it.

www.bettermoneyhabits.com

Have you heard about Khan Academy? It's a not-for-profit with the goal of changing education. It offers a wonderful, easy way to learn by providing a free, world-class education for anyone anywhere. It covers math, science, finance and history.

They have recently partnered with Bank of America and created a website offering videos that teach about money management: www.bettermoneyhabits.com

You may learn how to compute compound interest, to manage credit and to buy or rent a house. You do not have to be a BoA customer as the site stands alone.

We are so fortunate to live with and use technology. If we don't know something, there are so many ways we may learn using the internet. Check out the site and see what new ideas they offer. My favorite section is on understanding credit. It really opens your eyes to the cost of borrowing and building your credit score.

Be $ smart; keep learning how to better manage your money.