How many times have you said to yourself…
“I can’t afford it.”
If your life is spent living paycheck to paycheck, then you need to start saving today for a better tomorrow.
As cliche as it sounds, there’s truth in investing your money.
The secret is compound interest.
According to Merriam-Webster, compound interest is “interest computed on the sum of an original principal and accrued interest.”
The money you initially put into a retirement account, for example, will earn interest, of course, but so will its interest. Interest that grows its own interest is pretty cool!
If you want to get started, here are 3 things you should today to have thousands (and maybe MILLIONS in your retirement account).
1. Start when you’re young
If you really want to accrue interest, then you have to start off young.
Here’s a quick compound interest example to explain my point:
19-year-old Susan opened an individual retirement account (IRA) very early. She had a $1000 investment to start with, thanks to some savings and graduation money, and committed to a $100-per-month investment thereafter.
Several decades later, Susan turns 65 and is ready to retire and begin taking withdrawals from her IRA. She’s had 46 years to grow interest on her initial$1000 investment plus her $100-per-month deposits.
The initial investment, plus her monthly contributions, came to a grand total of $56,200 over the 46 years she has owned her IRA account. Her retirement balance is–drum roll–$2,685,908.81. She has earned a total of $2,629,708.81 in free interest money.
2. Make consistent investments
In that example I mentioned above, the reason Susan was able to make a lot off of compound interest was because she was consistently contributing money to her IRA account.
If you want free interest, then you have to commit to the process.
As soon as you stop contributing, you lose thousands of dollars on interest.
It is better to contribute some, instead of none, though, so if cash becomes a little strapped, try to continue to always contribute something.
If you’re a business owner like I am, then using a Profit First accounting system can help you guarantee you take home money to invest. Read the book by Michael Michalowicz if you haven’t already.
Your contributions should be like a snowball. Start small and then get larger.
As long as you move in a forward direction, you’ll be good.
3. Look for interest rates above 10%
To really maximize this strategy, you need to choose an account with great interest rates.
You know, kind of at the rate that credit card companies charge you.
(Only kidding.)
While it is true that interest returns on investment can always vary, a 10 percent return on investment or even more… is totally doable.
A buy and hold investment mindset can present you with mutual funds that fall into the 12% compound interest account category.
Based on experience with Vanguard mutual funds, the growth rates over a five-year period right now are 12.9%, 13.2%, and 17.3%.
There are dozens of investment types, but the mutual fund is a strong choice when you start an individual retirement account.
Conclusion
If you want to have money retire, then you need to start saving today.
As you seek financial freedom, keep these 3 compound interest principles in mind:
- Start when you’re young
- Make consistent investments
- Look for interest rates above 10%
Has compound interest worked wonders for you?
Share your stories below in the comments!