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The Power of Compound
Interest
How important is it to begin putting aside
money for savings right now, as opposed to sometime
later?
The following chart illustrates the effect of compound
interest on savings over the course of 40-plus years.
It shows that now is the time for saving.
The sooner you start to save, the greater the benefit
of compound interest. Compound interest is the
interest earned on reinvested interest, in addition to
the original amount invested.
Here's an example: Two different individuals--Darryl
and Cheryl, each 22 years old--have an extra $2,000 a
year to invest or spend as they choose. Darryl opens
an Individual Retirement Account (IRA) to start
saving. Cheryl chooses to spend her $2,000.
In this example, Darryl's IRA earns 12% per year.
Darryl saves $2,000 per year for six years, then never
puts another cent into his IRA.
Cheryl spends her $2,000 per year for six years. After
that time, she invests $2,000 per year until she is 65
years old. Cheryl earns the same 12% interest per year
that Darryl does.
The chart below shows the value of Darryl's and
Cheryl's respective IRAs, from the time they are 22
years old all the way to 65. Keep in mind, Darryl's
total investment is $12,000 ($2,000 per year for the
first six years), while Cheryl's is $74,000 ($2,000
per year for the last 37 years).
As you can see, with compound interest, the
earlier you start saving, the greater the accumulated
interest on your original investment. The important
thing is to start saving your money. The best time to
start saving is now--no matter how large or small the
amount. It's never too late to start. Remember, today
is the first day of the rest of your life, so get time
on your side and plan for your future by starting to
save--now.
By InCharge Education Foundation
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