The Best Kept Secret of Investing
A very good friend and financial advisor sent me this when I asked her for some tips to share with my readers.
The story both excites me and terrifies me. It excites me because I have the opportunity to motivate others to do what I have not done. It terrifies be because I had not followed my friends advice and am now wishing I had spent less money on suede jackets, killer heels and drinks at the Misty Moon and had saved that money instead. So I urge you, read this, and pass it along to anyone in your life who can benefit from it today!
Here are a few examples of the power of compound interest at work.
Two 21 year old friends are saving for their retirement. The first friend begins saving right away. She invests $100 every month for ten years and stops investing on her 31st birthday. Her total investment is $12,000 then she lets it sit, earning interest until she retires.
The second friend waits until she turns 35 and invests $100 every month until she reaches age 65. Her total investment is $36,000.
Who ends up with more money?
You would think the second friend would, because she invested more ($36,000 instead of $12,000). However the first friend has time and compound interest on her side. With an annual interest rate of 8%, the first friend would end up with $300,053, while the second friend would only have $150,030. The first friend invested $24,000 less than her friend but ended up with $150,022 more!
Now suppose the first friend continued investing $100 every month until age 65. Her total investment of $52,800 would have grown to $489,120. That’s the power of compound interest!