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Tag: compound interest

How Compound Interest Works

Sylvia Flores / 27 Sep 2017 / Personal Finance

What is Compound Interest? 

Merriam-Webster defines compound interest as:

Interest computed on the sum of an original principal and accrued interest.

Let’s put that in friendlier terms. Compound interest gives you interest on top of your original investment and additional interest.

Imagine you have $100,000.00.

If you were gaining a 10% annual return, then you would end up with $10,000 added to your original investment. In this case, your end balance would be $110,000 in year one.

In year two, the markets are great, and you are getting a 10% rate of return on $110,000, leaving you with an ending balance of $121,000. You earned $10,000 in year one. You earned $11,000 in year two. In year three, using this same math, you’d earn $12,100.

If you carry that out for 30 years or more, you could be sitting on a very comfortable nest egg.

Learn more about how much you should be saving for retirement

Most people my age (their 20’s) plan to start saving for retirement in their 40’s and 50’s. As their working lives draw to a close, they plan on using the extra dollars earned over that time to bankroll their retirement. But simple math reveals that saving the same amount of money in your 20’s can yield over twice as much as saving the same amount in your 40’s or 50’s as compound interest works its financial sorcery.

The benefits of saving in your 20’s are clear. But even if a young saver is aware of the advantages of saving early in his life, he or she might feel that their budget is just too thin to spare. It’s hard enough just trying to keep your lights on in your 20’s, and with the cost of living increasing at an average of 5% over the past 10 years, it’s not likely to get any easier.

But what if you were making more money now relative to your cost of living than you would at the end of your career? In 2011 household earners between the ages of 45 to 54 have brought home 16.9% less than they did in 19991. To be sure the earnings of workers in their 20’s and early 30’s have dropped as well during the past decade, 16.2% and 12.5% respectively.

However, compared to 2010, earners between the ages of 15 and 24 saw their incomes increase by 4.6% while earners between the ages of 45 to 54 actually lost 4% of their incomes.

All the trends appear to be pointing in one direction: save while you’re young!

1. http://www.advisorperspectives.com/dshort/updates/Household-Incomes-by-Age-Brackets.php

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© 2018 Ubiquity Retirement + Savings / Privacy Policy
1160 Battery Street, Suite 350, San Francisco, CA 94111 / Support: 855.401.4357