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Content Highlights A
Financial Warm-up |
Savings
Fitness: Maximizing Your Workout Potential The Power Of Compounding Regardless of where you choose to put your money- cash, stocks, bonds, real estate, or a combination of places - the key to saving for retirement is to make your money work for you. It does this through the power of compounding. Compounding investment earnings is what can make even small investments become larger given enough time. You're probably already familiar with the principle of compounding. Money you put into a savings account earns interest. Then you earn interest on the money you originally put in, plus on the interest you've accumulated. As the size of your savings account grows, you earn interest on a bigger and bigger pool of money. POWER OF COMPOUNDING The value of $1,000 compounded at various rates of return overtime is as follows:
The chart provides an example of how an investment grows at different annual rates of return over different time periods. Notice how the amount of gain gets bigger each 10 year period. That's because money is being earned on a bigger and bigger pool of money. Also notice that when you double your rate of return from 4 percent to 8 percent, the end result after 30 years is over three times what you would have accumulated with a 4 percent return. That's the power of compounding! The real power of compounding comes with time. The earlier you start saving, the more your money can work for you. Look at it another way. For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up. That's why no matter how young you are, the sooner you begin saving for retirement, the better. |