Create A Prosperous Retirement By Harnessing The Power Of Compound Interest
Do you have 30 to 40 years until you retire? If so the miracle of compound interest can be harnessed to ensure prosperity when you do. What is compound interest? Compound interest refers to the fact that whenever interest is calculated, it is based not only on the original principal, but also on any unpaid interest that has been added to the principal. The more frequently interest is compounded, the faster the balance grows.
A potent example of its power comes from a history lesson most of us learned as children. When the Dutch arrived in what is now New York City in 1626 they purchased the land that would become New York from Native Americans in an apparently one-sided transaction for $24. The transaction was in fact one-sided but not in the way most people think. If the Native Americans had placed that $24 in a bank earning 6% interest their original investment would have been worth over $10 billion as of 2005.
The key to putting this immense power to work is to start saving immediately. And no matter what your salary you must figure out a way to sock away at least 15 percent of your pre-tax income.
If you aren't saving any of your income stepping up to the plate and putting away 15 percent probably seems daunting. It doesn't have to be.
Instead of putting away 15% immediately, work up to that figure gradually. Set up an automatic withdrawal from your paycheck to be deposited in your 401(k). If your employer doesn't offer a 401(k) set up an IRA and have the money automatically deposited there. You can invest a maximum of $4,000 for an IRA and $15,000 for a 401(k) per year. You can also invest $4,000 annually in a Roth IRA alongside any other investments you make.
Start deducting 1% of your paycheck to be deposited in your account. You probably won't even notice the difference. Then next month up your allocation to 2% of your paycheck. Then in month 3, 3%, and so on. 15 months from now you'll be saving 15% of your salary and because you implemented the change gradually your spending habits will have changed to accommodate the savings automatically.
Next step is to decide what you want to do with the money your saving. If you're comfortable investing and dedicated to making your money work for you, you'll have plenty of ideas on how to do this.
For anyone who doesn't want to spend their time this way, luckily there is a nice alternative. Vanguard, Fidelity, and most other major mutual fund companies now offer a product often called lifecycle funds. Although the specific name for the funds will vary depending on the company.
Estimate when you'll want to retire 2030, 2035, 2040 etc... and the fund automatically reallocates your money to age appropriate investments. Typically this involves shifting money from equities to bonds as you get older and near retirement.
Based on the asset allocation of these funds and the historical returns of the asset classes they invest in you can expect an average return of about 9% during the life of your investment.
So a 25 year old earning $30,000 and saving $4,500 a year can expect to retire with $613,384 at 55 and $1,520,471 if he waits until 65. This example also illustrates how the longer you put compounding to work the more astonishing the result will be. By harnessing compounding the 25 year old in this example can retire a millionaire at 65 while never receiving a raise.
With a normal career path involving raises an individual would be able to rack up a much larger nest egg.
Skeptical about these figures. Then think of compound interest as a snowball. Because of the interest you receive during your first year of investing the second year you're already earning more interest than you earned the first year even though you're earning the same interest rate. The third year, you'll be earning more than the second year, and so on. Because your investments are compounding they are growing geometrically over time, similar to a snowball rolling down a hill and expanding at a faster and faster rate as it continues to roll.
The longer the ball rolls down the hill the bigger it becomes. That is why its important to start saving now so your ball has as much time to grow as possible before you want to retire.
A potent example of its power comes from a history lesson most of us learned as children. When the Dutch arrived in what is now New York City in 1626 they purchased the land that would become New York from Native Americans in an apparently one-sided transaction for $24. The transaction was in fact one-sided but not in the way most people think. If the Native Americans had placed that $24 in a bank earning 6% interest their original investment would have been worth over $10 billion as of 2005.
The key to putting this immense power to work is to start saving immediately. And no matter what your salary you must figure out a way to sock away at least 15 percent of your pre-tax income.
If you aren't saving any of your income stepping up to the plate and putting away 15 percent probably seems daunting. It doesn't have to be.
Instead of putting away 15% immediately, work up to that figure gradually. Set up an automatic withdrawal from your paycheck to be deposited in your 401(k). If your employer doesn't offer a 401(k) set up an IRA and have the money automatically deposited there. You can invest a maximum of $4,000 for an IRA and $15,000 for a 401(k) per year. You can also invest $4,000 annually in a Roth IRA alongside any other investments you make.
Start deducting 1% of your paycheck to be deposited in your account. You probably won't even notice the difference. Then next month up your allocation to 2% of your paycheck. Then in month 3, 3%, and so on. 15 months from now you'll be saving 15% of your salary and because you implemented the change gradually your spending habits will have changed to accommodate the savings automatically.
Next step is to decide what you want to do with the money your saving. If you're comfortable investing and dedicated to making your money work for you, you'll have plenty of ideas on how to do this.
For anyone who doesn't want to spend their time this way, luckily there is a nice alternative. Vanguard, Fidelity, and most other major mutual fund companies now offer a product often called lifecycle funds. Although the specific name for the funds will vary depending on the company.
Estimate when you'll want to retire 2030, 2035, 2040 etc... and the fund automatically reallocates your money to age appropriate investments. Typically this involves shifting money from equities to bonds as you get older and near retirement.
Based on the asset allocation of these funds and the historical returns of the asset classes they invest in you can expect an average return of about 9% during the life of your investment.
So a 25 year old earning $30,000 and saving $4,500 a year can expect to retire with $613,384 at 55 and $1,520,471 if he waits until 65. This example also illustrates how the longer you put compounding to work the more astonishing the result will be. By harnessing compounding the 25 year old in this example can retire a millionaire at 65 while never receiving a raise.
With a normal career path involving raises an individual would be able to rack up a much larger nest egg.
Skeptical about these figures. Then think of compound interest as a snowball. Because of the interest you receive during your first year of investing the second year you're already earning more interest than you earned the first year even though you're earning the same interest rate. The third year, you'll be earning more than the second year, and so on. Because your investments are compounding they are growing geometrically over time, similar to a snowball rolling down a hill and expanding at a faster and faster rate as it continues to roll.
The longer the ball rolls down the hill the bigger it becomes. That is why its important to start saving now so your ball has as much time to grow as possible before you want to retire.
Do you have 30 to 40 years until you retire? If so the miracle of compound interest can be harnessed to ensure prosperity when you do. What is compound interest? Compound interest refers to the fact that whenever interest is calculated, it is based not only on the original principal, but also on any unpaid interest that has been added to the principal. The more frequently interest is compounded, the faster the balance grows.
A potent example of its power comes from a history lesson most of us learned as children. When the Dutch arrived in what is now New York City in 1626 they purchased the land that would become New York from Native Americans in an apparently one-sided transaction for $24. The transaction was in fact one-sided but not in the way most people think. If the Native Americans had placed that $24 in a bank earning 6% interest their original investment would have been worth over $10 billion as of 2005.
The key to putting this immense power to work is to start saving immediately. And no matter what your salary you must figure out a way to sock away at least 15 percent of your pre-tax income.
If you aren't saving any of your income stepping up to the plate and putting away 15 percent probably seems daunting. It doesn't have to be.
Instead of putting away 15% immediately, work up to that figure gradually. Set up an automatic withdrawal from your paycheck to be deposited in your 401(k). If your employer doesn't offer a 401(k) set up an IRA and have the money automatically deposited there. You can invest a maximum of $4,000 for an IRA and $15,000 for a 401(k) per year. You can also invest $4,000 annually in a Roth IRA alongside any other investments you make.
Start deducting 1% of your paycheck to be deposited in your account. You probably won't even notice the difference. Then next month up your allocation to 2% of your paycheck. Then in month 3, 3%, and so on. 15 months from now you'll be saving 15% of your salary and because you implemented the change gradually your spending habits will have changed to accommodate the savings automatically.
Next step is to decide what you want to do with the money your saving. If you're comfortable investing and dedicated to making your money work for you, you'll have plenty of ideas on how to do this.
For anyone who doesn't want to spend their time this way, luckily there is a nice alternative. Vanguard, Fidelity, and most other major mutual fund companies now offer a product often called lifecycle funds. Although the specific name for the funds will vary depending on the company.
Estimate when you'll want to retire 2030, 2035, 2040 etc... and the fund automatically reallocates your money to age appropriate investments. Typically this involves shifting money from equities to bonds as you get older and near retirement.
Based on the asset allocation of these funds and the historical returns of the asset classes they invest in you can expect an average return of about 9% during the life of your investment.
So a 25 year old earning $30,000 and saving $4,500 a year can expect to retire with $613,384 at 55 and $1,520,471 if he waits until 65. This example also illustrates how the longer you put compounding to work the more astonishing the result will be. By harnessing compounding the 25 year old in this example can retire a millionaire at 65 while never receiving a raise.
With a normal career path involving raises an individual would be able to rack up a much larger nest egg.
Skeptical about these figures. Then think of compound interest as a snowball. Because of the interest you receive during your first year of investing the second year you're already earning more interest than you earned the first year even though you're earning the same interest rate. The third year, you'll be earning more than the second year, and so on. Because your investments are compounding they are growing geometrically over time, similar to a snowball rolling down a hill and expanding at a faster and faster rate as it continues to roll.
The longer the ball rolls down the hill the bigger it becomes. That is why its important to start saving now so your ball has as much time to grow as possible before you want to retire.
A potent example of its power comes from a history lesson most of us learned as children. When the Dutch arrived in what is now New York City in 1626 they purchased the land that would become New York from Native Americans in an apparently one-sided transaction for $24. The transaction was in fact one-sided but not in the way most people think. If the Native Americans had placed that $24 in a bank earning 6% interest their original investment would have been worth over $10 billion as of 2005.
The key to putting this immense power to work is to start saving immediately. And no matter what your salary you must figure out a way to sock away at least 15 percent of your pre-tax income.
If you aren't saving any of your income stepping up to the plate and putting away 15 percent probably seems daunting. It doesn't have to be.
Instead of putting away 15% immediately, work up to that figure gradually. Set up an automatic withdrawal from your paycheck to be deposited in your 401(k). If your employer doesn't offer a 401(k) set up an IRA and have the money automatically deposited there. You can invest a maximum of $4,000 for an IRA and $15,000 for a 401(k) per year. You can also invest $4,000 annually in a Roth IRA alongside any other investments you make.
Start deducting 1% of your paycheck to be deposited in your account. You probably won't even notice the difference. Then next month up your allocation to 2% of your paycheck. Then in month 3, 3%, and so on. 15 months from now you'll be saving 15% of your salary and because you implemented the change gradually your spending habits will have changed to accommodate the savings automatically.
Next step is to decide what you want to do with the money your saving. If you're comfortable investing and dedicated to making your money work for you, you'll have plenty of ideas on how to do this.
For anyone who doesn't want to spend their time this way, luckily there is a nice alternative. Vanguard, Fidelity, and most other major mutual fund companies now offer a product often called lifecycle funds. Although the specific name for the funds will vary depending on the company.
Estimate when you'll want to retire 2030, 2035, 2040 etc... and the fund automatically reallocates your money to age appropriate investments. Typically this involves shifting money from equities to bonds as you get older and near retirement.
Based on the asset allocation of these funds and the historical returns of the asset classes they invest in you can expect an average return of about 9% during the life of your investment.
So a 25 year old earning $30,000 and saving $4,500 a year can expect to retire with $613,384 at 55 and $1,520,471 if he waits until 65. This example also illustrates how the longer you put compounding to work the more astonishing the result will be. By harnessing compounding the 25 year old in this example can retire a millionaire at 65 while never receiving a raise.
With a normal career path involving raises an individual would be able to rack up a much larger nest egg.
Skeptical about these figures. Then think of compound interest as a snowball. Because of the interest you receive during your first year of investing the second year you're already earning more interest than you earned the first year even though you're earning the same interest rate. The third year, you'll be earning more than the second year, and so on. Because your investments are compounding they are growing geometrically over time, similar to a snowball rolling down a hill and expanding at a faster and faster rate as it continues to roll.
The longer the ball rolls down the hill the bigger it becomes. That is why its important to start saving now so your ball has as much time to grow as possible before you want to retire.
posted by zzzzzzzzzzz at
1:59 AM
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