If I told you that Albert Einstein had something to say about money, would you be curious to know what it was? Well, just keep reading! Einstein referred to compound interest as the "Eighth Wonder of the World". So, what is compound interest? It is when interest on an investment also earns interest. Think of it this way: if you put $1,000 into your retirement account and earn a 10% rate of return, after one year you will have $1,100. You will have earned $100 of interest. Now, if you let that money set for another year, you will earn 10% on your original $1,000 + the $100 of interest from year one, giving you another $110 of interest by the end of the second year. Pretty cool, huh? But who's getting excited about an extra $10? I'll tell you who should be getting excited - You! Let's run this out for a few more years. Say you're a 25 year old and just amassed your first $1,000 in your retirement account. That $1,000 (earning 10% per year) will grow to $45,259 by the time you reach age 65! You put in $1,000 and compound interest gives you $44,259! That is a pretty good trade off!
Now, lets have a little more fun. What if that same 25 year old invested another $1,000 each year (a whopping $83/month) until he reached age 65. Any idea how much money would be in that same account? $466,198! And what if that 25 year old decided they would rather invest another $300 each month instead of giving it to the bank as a car payment? They would end up having $2,144,580 waiting for them when they hit retirement, and they would have only put in $184,000 of their own money! Nearly $2 MILLION dollars would be from compound interest! I don't know about you, but I think a $2.1 million dollar nest egg sounds a heck of a lot better than just a social security check.
The younger you are, the more compound interest will work in your favor. Bad financial decisions made in your 20's and 30's can set you back DECADES, and there is no way to get that time back. The people who really win with money make major financial decisions, like car and home purchases, based on how it will affect them in 10, 20, or even 30+ years. They don't care what you or I think about the car they drive, because they know that later in life they will be able to drive cars that most people can only dream of.
I'll leave you with one of my favorite quotes: "Adults devise a plan and follow it, children do what feels good". Now get out there and start making a plan!
*Are you excited what you just read, but feel like money is always very tight and that you'll never have any extra to invest? Baseline Financial Solutions can help, and we're only a click away. Our one-on-one Financial Coaching will teach you how to control your finances, quickly pay off debt, save an emergency fund, and finally get to a place where you are able to invest for your future. CLICK HERE to send us a message or call (605) 252-5972. Baseline Financial Solutions, LLC is located in Aberdeen, SD.