The power of compound interest is immense, although it doesn’t necessarily feel like you are making great progress in the early years of investing. While compounding is an incredible force, it does take time work its magic. This is why you will often hear advisors at Pegasus Financial Group tell you time is your greatest ally when it comes to investing.
So, you might be asking yourself, “what does this mean for me”?
Start paying yourself first and start paying yourself now. Make yourself a priority and understand that even starting by saving $50 or $100 per month can have a huge impact over the course of long periods of time.
Example: Saving $50 per month over the course of 35 years (a total of $21,000 saved) growing at 8% per annum ends at $104,129.35. Now, let’s imagine that you are able to save $100 per month for 10 years then you are able to increase your monthly savings to $200 per month for the remaining 25 years. Your total savings in this scenario was $72,000. In this scenario, your total investment would have grown to $295,910.51 given an 8% growth rate per annum.
Now, let’s take a look at another example. Consider that you are able to increase your savings over time as your income increases, continuing to pay yourself first based upon your income rather than simply letting your lifestyle spending increase without increasing the pay yourself first strategy. Imagine how much you could set aside if you saved $100 per month for 5 years, $200 per month for 5 years, $300 per month for 5 years, $400 per month for 5 years, $500 per month for 5 years, $600 per month for 5 years, and $700 per month for 5 years. Your total savings in this scenario was $168,000 over the course of 35 years. At the end of the 35 year period you would have accumulated a nest egg of $543,846.32 given an 8% growth rate per annum. If you were to stop investing after the 35 year period and simply leave the money invested for an additional 10 years at 8% growth per annum, the nest egg could grow to $1,174,123.41.
*These examples assume an 8% annual growth rate and should not be construed as a guarantee of compounding return.
To further look at your individual situation, the SEC website and calculator listed below, which was used for the examples above, is a good tool to help you see the value of saving and compounding.