A million dollars seems to be the number that most of us shoot for when trying to come up with an amount of money that is sufficient to retire; to be rich; or for some other reason. There is obviously debate as to whether that will be enough now to fulfill some of those dreams. One one hand, if you can acquire that much money, you are doing well. However, I would say you still cannot live carefree as you can easily spend it all and end up back where you started. With that being said, let’s look at a few ways compound interest can help you build your net worth to $1 million.
Lump Sum Doubling
At 12%, using the rule of 72, your money will double every 6 years.
Without getting into the detailed calculations, if you start with $4,031.25, this is what will happen with your money.
In 6 years at a 12% annual return you will have $8,062.50
In 12 years at a 12% annual return you will have $16,125
In 18 years at a 12% annual return you will have $32,250
In 24 years at a 12% annual return you will have $62,500
In 30 years at a 12% annual return you will have $125,000
In 36 years at a 12% annual return you will have $250,000
In 42 years at a 12% annual return you will have $500,000
In 48 years at a 12% annual return you will have $1,000,0000
If you can save up $4,000 and invest if for your 12 year old son, he will wake up at the age of 60 with a million dollars. This is without contributing a dime to the original amount.
Compound interest is your friend when it is working with you. Get out of debt and use a disciplined approach to saving and investing over time. Compound interest will then become a wave pushing you from behind rather than knocking you down. Pick an amount that you can contribute on a regular basis over a long period of time and you will turn yourself into a millionaire. Consider these savings goals:
Save $100 monthly at 12% interest for 40 years and you will have $1,030,970.87
Save $500 monthly at 10% interest for 30 years and you will have $1,085,660.55
Save $1,000 monthly at 8% interest for 25 years and you will have $1,107,887.72
As you get raises, consider increasing your monthly contribution and you can reach your millionaire savings goal that much quicker.
Be a responsible parent and make sure your teens know this math. It could be worth a million dollars!
Get Ahead of the Game
For those us us who are still young, consider getting ahead of the game early so you can let compound interest do most of the work. Most of us have heard about the Ben vs Arthur scenario. Ben is the guy who contributed $2,000 per year from age 19 through age 26 and then stopped saving for the rest of his working career. Arthur is the procrastinator who waited until he was 27 to start saving and then became very involved by contributing $2,00o per year until he retired at the age of 65. Who ended up with a larger retirement fund? Many are surprised to find out that Ben had a nest egg of $2,288,996 versus hard working Arthur’s $1,532,166. Wouldn’t you rather be Ben? Arthur worked so hard but did not outwork how smart Ben was by getting going early.
My advice: Be Ben and Arthur and retire at 55 or 60!
As they say, the best time to start saving is when you are young. The second best time is today! Maybe you are 40 and have not yet paid much attention to your savings. No problem, start saving! You may have to save a little bit more per year and for more years, but you are better off starting now than waiting until you are 50 to put together a plan.
Compound interest is very powerful! Is is so powerful that is can make you a slave for life if you get on the wrong side of it. Is is also so powerful that is can turn a meager salary with a savings plan into a millionaire in 30 years or less.
Do you have a compound interest story? How has it worked for or against you? Do you see yourself becoming a millionaire because of the power of compound interest?