What is Compound Interest?
Simplified – Compound interest is interest on top of interest, earned.
And so what’s the big deal? Well, here is a great example that will put it into perspective for you:
Say you have 2 Investors (Investor A & Investor B) investing $2,000 per year and each make 8% interest annually.
- Investor A invests from age 18 to age 37 (20 years in total) & stops making investments
- Investor B invests from age 26 to age 65 (40 years in total) & stops at retirement
Who has more? And Why?
- Investor A hypothetical account value = $795,543
- Investor B hypothetical account value = $521,331
The $274,212 increase for investor A is from the “snowball” effect of compound interest. Investor A had 8 additional years of growth by the time Investor B started, and Investor A already had over $25,000 saved while investor B just made their first $2,000 contribution. By the time Investor A stopped contributing they had saved over $99,000 while Investor B only saved $43,393.50. The difference between Investor A & B continues to spread further apart.
You might be asking how much investor A would have if they continued to invest, and the answer is $986,221.45. If you can start saving $2,000 per year at age 18 and earn an 8% interest rate you can become a millionaire by the time you are 66 years old.
Don’t believe me? I included the data at the end of this blog post.
Still don’t believe me? There is a real-world example from Ben Franklin and why he was a big fan - https://www.ryanjmarshall.com/resource-center/money/the-power-of-compound-interest
Feel free to calculate your potential compounding interest amount here - https://www.ryanjmarshall.com/resource-center/investment/how-compound-interest-works
Have additional questions? Click here to Schedule your free consultation with me where we can discuss how compound interest can make your money work for you.
Age | Investor A Invests | 8% | Investor B Invests | 8% |
18 | $2,000 | $2,160.00 | $0 |
|
19 | $2,000 | $4,332.80 | $0 |
|
20 | $2,000 | $6,679.42 | $0 |
|
21 | $2,000 | $9,213.78 | $0 |
|
22 | $2,000 | $11,950.88 | $0 |
|
23 | $2,000 | $14,906.95 | $0 |
|
24 | $2,000 | $18,099.51 | $0 |
|
25 | $2,000 | $21,547.47 | $0 |
|
26 | $2,000 | $25,271.26 | $2,000 | $2,160.00 |
27 | $2,000 | $29,292.97 | $2,000 | $4,332.80 |
28 | $2,000 | $33,636.40 | $2,000 | $6,679.42 |
29 | $2,000 | $38,327.32 | $2,000 | $9,213.78 |
30 | $2,000 | $43,393.50 | $2,000 | $11,950.88 |
31 | $2,000 | $48,864.98 | $2,000 | $14,906.95 |
32 | $2,000 | $54,774.18 | $2,000 | $18,099.51 |
33 | $2,000 | $61,156.11 | $2,000 | $21,547.47 |
34 | $2,000 | $68,048.60 | $2,000 | $25,271.26 |
35 | $2,000 | $75,492.49 | $2,000 | $29,292.97 |
36 | $2,000 | $83,531.89 | $2,000 | $33,636.40 |
37 | $2,000 | $92,214.44 | $2,000 | $38,327.32 |
38 | $0 | $99,591.60 | $2,000 | $43,393.50 |
39 | $0 | $107,558.92 | $2,000 | $48,864.98 |
40 | $0 | $116,163.64 | $2,000 | $54,774.18 |
41 | $0 | $125,456.73 | $2,000 | $61,156.11 |
42 | $0 | $135,493.27 | $2,000 | $68,048.60 |
43 | $0 | $146,332.73 | $2,000 | $75,492.49 |
44 | $0 | $158,039.35 | $2,000 | $83,531.89 |
45 | $0 | $170,682.49 | $2,000 | $92,214.44 |
46 | $0 | $184,337.09 | $2,000 | $101,591.60 |
47 | $0 | $199,084.06 | $2,000 | $111,718.92 |
48 | $0 | $215,010.79 | $2,000 | $122,656.44 |
49 | $0 | $232,211.65 | $2,000 | $134,468.95 |
50 | $0 | $250,788.58 | $2,000 | $147,226.47 |
51 | $0 | $270,851.67 | $2,000 | $161,004.59 |
52 | $0 | $292,519.80 | $2,000 | $175,884.95 |
53 | $0 | $315,921.38 | $2,000 | $191,955.75 |
54 | $0 | $341,195.10 | $2,000 | $209,312.21 |
55 | $0 | $368,490.70 | $2,000 | $228,057.19 |
56 | $0 | $397,969.96 | $2,000 | $248,301.76 |
57 | $0 | $429,807.56 | $2,000 | $270,165.90 |
58 | $0 | $464,192.16 | $2,000 | $293,779.17 |
59 | $0 | $501,327.53 | $2,000 | $319,281.51 |
60 | $0 | $541,433.74 | $2,000 | $346,824.03 |
61 | $0 | $584,748.44 | $2,000 | $376,569.95 |
62 | $0 | $631,528.31 | $2,000 | $408,695.55 |
63 | $0 | $682,050.58 | $2,000 | $443,391.19 |
64 | $0 | $736,614.62 | $2,000 | $480,862.49 |
65 | $0 | $795,543.79 | $2,000 | $521,331.49 |