How to be a millionaire before 50
- July 13th, 2016
- Rich Smith
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The title might be a bit of an exaggeration – it doesn’t have to be – but it certainly can help you have a significantly more comfortable retirement. It’s called compounding interest, and it’s going to make you rich. The best way to take advantage of compound interest is to start investing as young as possible.
It’s called compounding interest, and it’s going to make you rich.
Compound interest allows you to earn interest on the interest you’ve already earned. Sounds like a mouthful, right? But it is really quite simple. It means that for every year after the initial investment you earn money on the investment plus all interest earned. It makes sense then that the earlier you can get the initial sum accruing interest, the greater your returns will be.
Because you make money on interest, even small amounts invested on a monthly or bi-monthly basis can add up very quickly. To see the importance of starting to invest young, we consider three cases below:
- Mary starts saving after university. Starting at 22 she invests $300 a month.
- James waits until he is a little more settled in life and begins investing at 32. He puts $300 a month.
- Francine didn’t think about retirement until her kids were older. She started putting $300 a month at age 42.
Let’s assume Mary, James and Francine all invest at a 5% compounding interest rate. Let us compare where they will be at retirement age of 65.
By investing $300 a month since she was 20, Mary invested $162,000 over 45 years. Thanks to compounding interest, Mary earned $445,931.19 by the time she was 65, giving her a retirement fund of $607,931.19. She almost tripled her investment with minimal monthly contributions.
James invested later and ended up investing $126,000.00 over 35 years. He earned $214,827.73 in interest, giving James a nice retirement nest egg of $340,827.73.
Though Francine started investing later than either James or Mary, she still managed to invest $90,000 by the time she was 65. In 25 years Francine close to doubled her money, earning $88,652.91 in interest. Francine can retire happily with $88,652.91.
Compared to her counterparts of James and Francine, Mary’s retirement fund was 73% interest, James’ was 61% and Francine’s was 47%.
Asked once what the greatest invention of all times was, Albert Einstein is said to have replied, “Compound Interest“. Even with such a basic example, it is clear that investing early is the best option to maximize your return. If you can’t start early, start now, because every day benefiting from the forces of compounding counts .