Compound interest may very well be the 8th wonder of the world with its ability to turn rags to riches and dreams into reality. Warren Buffet lauds it, John Bogle touted it, and even Einstein discussed it, but what is compound interest?
The basic notion of compound interest is that both your contributions and interest earned grow with time, snowballing substantially as the years pass. Now, the keyword here is that both your contributions and the interest earned grow with time. Thus, with compound interest, your interest earns interest!
For example, a dollar a day invested in the US stock market for the past 30 years would have grown to nearly $77,000 today, even though you only contributed $11,000 during this span.
Hence, compounding is a powerful thing.
But compounding doesn't just increase savings with time, as it increases the opportunity cost of not saving with time, too.
For example, had you waited until you took home an extra $500 a month, which we will say took two years, your future self misses out on nearly $14,000 of growth in the future! Crazy, I know.
Therefore, it doesn't matter how much or little you can save today. What truly matters is that you start rather than wait.
And yes, while saving is a tedious process that can take years to bear fruit, it is worthwhile. After all, having the financial freedom to retire on your terms is a goal worth striving for, isn't it?
Plus, a dollar saved and invested today is undoubtedly worth more than a dollar tomorrow, which will have lost purchasing power to inflation.
So, for one last time, don't wait. Initiate your new saving habits today! Whether it be an extra $1, $100, or $1,000 a month, anything is enough when you let compound interest do its magic. Which, depending on what type of account you use, can yield substantial tax benefits, too.
Be sure to come back to our blog for next week's post, where I will discuss the power of using an IRA and compound interest to create future wealth.
Thanks for reading!