Investing these days is a little scary, as many people are still trying to figure out how long it will take for their investment accounts to regain all that they lost in recent months. So, instead of looking at investments such as stocks and bonds, I’d like to look at an investment tool that almost all of us can take advantage of without having large amounts of money. What is this magical investment? Savings and the magic of compound interest.
If you take an inventory of all the “get rich” books, the common thread is savings. I work with many people earning a wide range of incomes. People earning $20,000 per year will often tell me, “If I only made more money, I’d be okay.” I’ve also had people earning $100,000 per year tell me the same thing. In the end, it isn’t how much money you make, but rather, what you do with that money. Savings really are the key to wealth!
Compound interest can help you build a nest egg that you can count on for retirement. Compound interest isn’t about quick results—it’s about long-term benefits. With this investment, mom’s favorite phrase, “Patience is a virtue,” really holds true. To help you better understand the power of investing early, let’s look at an example.
If at the beginning of his working career McKenzie starts contributing $5,000 annually to his Roth IRA and earns 8% interest, he will have $1,932,529 saved at retirement. But if McKenzie waits five years to start contributing, he would need to put $7,500 into his IRA annually in order to have saved the same amount of money.
Now, I know many of you are thinking, “I don’t have any money to save!” But if you examine your spending, you may find that you could easily come up with extra money. Here are a few possibilities: change your withholding and have that amount transferred to savings; brown bag your lunch; use the library to rent DVDs; learn to cook and utilize the SHARE program; and finally, keep track of your money and ask yourself, “Do I really need this or can I do with a little less?”
Compound interest has the possibility to give you a comfortable retirement. The question is, do you have the desire and the patience to take the plunge? Good luck!