The Power of Compound Interest

It has been said that:

The most powerful force in the universe is compound interest. - Albert Einstein 

And just in case you do not yet grasp exactly how right Einstein was, I'd like to show you something:

The Power of Compounding Interest

Scenario # 1: Paul P. Procrastinator

Assume that Paul has a lot going on in his life an he just can not spare any cash to invest until he turns 40. At age 40, paul has a mid-life crisis because he realizes he hasn't saved a dime for retirement. So Paul makes some life changes and starts investing $5,000 per year, for 20 years until age 59. Assuming Paul earns a return on investment of 7%, he will have a modest little nest egg of $219,326. That is $100,000 invested over 20 years, plus earnings of $119,326.

Not bad, you say

Now here is the fun part.

Scenario # 2: Frederick F. Frugal

Fred has his life together from the day he leaves college and he wants to start investing for retirement immediately. Fred starts socking away $5,000 per year, just like Paul. However Fred starts at age 22 and saves for only 10 years. If Fred enjoys the same 7% return on his investment that Paul earned, Fred will have a whopping $491,469 by the time he reaches age 59, or $50,000 of principal invested and $441,469 earned.

Now think about that. By starting early, Fred was able to save $50,000 less than Paul and still out-pace Paul's retirement savings by $272,143.

Read that again until you fully grasp what Einstein was saying. Then take a good hard look at your life and where you stand financially. I'm not telling you this to freak you out; you should always remember that it's never too late to start saving. I'm just trying to get the point across that, perhaps more importantly, it's never too early either.