THE GAME CHANGER
We’ve shown you how debt can grow and cost a lot of time and money to pay off. This is because of compound interest, the practice of interest being charged on interest. However, you can make compound interest work for you (interest earning you interest) by saving and investing. This is what is meant when people say “Make your money work for you.”
The earlier you get started, the more compound interest will work for you.
Let’s say two 21-year-olds decide to save for retirement. Bill puts $3,000 per year in an IRA and earns 8% compound interest every year. Marcia waits seven years longer (until 28) and then begins to invest the same way. At age 65, Bill will be a millionaire-with almost twice as much money as Marcia-even though he invested only $21,000 more.
| AGE | Bill | Marcia |
| 21 | $3,000 | $0 |
| 22 | $6,240 | $0 |
| 23 | $9,739 | $0 |
| 24 | $13,518 | $0 |
| 25 | $17,600 | $0 |
| 26 | $22,008 | $0 |
| 27 | $26,768 | $0 |
| 28 | $31,910 | $3,000 |
| 29 | $37,463 | $6,240 |
| 30 | $43,460 | $9,739 |
| 40 | $137,286 | $64,486 |
| 50 | $339,850 | $182,680 |
| 60 | $777,170 | $437,852 |
| 65 | $1,156,517 | $657,948 |
| Total Invested | Total Earned in Compound Interest | |
| $132,000 | ($3,000 a year for 44 years) | $1,027,517 |
| $111,000 | ($3,000 a year for 37 years) | $549,948 |
1. Savings fundamental #1: start early
Here’s another example: if 20-year old Elizabeth makes a one-time $5,000 investment to a retirement account that earns an average of 8% interest, that $5,000 will grow to $160,000 by the time she retires at 65. But if she waits until she’s 39 to make her single investment, that $5,000 would only grow to $40,000. The younger you start, the more your money will grow.
1. Scenario 1: Elizabeth makes a one time investment of $5,000 at age 20
| Age | One time investment | interest | grows to this amount at 65 |
| 20 | $5,000 | 8% | $160,000 |
2. Scenario 2: Elizabeth makes a one-time investment of $5,000 at age 39
| Age | One time investment | interest | grows to this amount at 65 |
| 39 | $5,000 | 8% | $40,000 |
That’s an amazing difference, and it shows the earlier you start the better. By the way, the interest rates given are for illustrative purposes only. You would be hard pressed to find them in our current economy for any reasonably safe investment. But you get the idea.
2. Savings fundamental #2: make regular contributions
Compound interest will work even better for you with regular contributions. If Elizabeth contributes $5,000 annually to her retirement account for 45 years, and if it continues to earn 8%, her retirement savings will be over $1.93 million!
Again, the younger you start the better. If Elizabeth waits five years to start contributing, her annual contributions would have to increase to nearly $7,500 a year to reach $1.93 million by the time she’s 65. If she waits until she’s 40, she’s going to have to contribute over $26,000 a year to have $1.93 million by the time she’s 65.
| Age starts contributing | yearly amont | int% | amount at 65 |
| 20 | $5,000 | 8% | $1.93 million |
| 25 | $7,500 | 8% | $1.93 million |
| 40 | $26,000 | 8% | $1.93 million |
We acknowledge that it may not be possible for you to put this plan into place now. Don’t let that defeat you, or throw you into a thinking trap. As our “savings” plan shows, there are many levels of savings, and there are things you can do right now, no matter what your situation is. Do what you can now and make plans to do more in the future. Savings Plans
A proper savings plan involves investing and setting up retirement accounts rather than just basic savings account like a CD because CDs won’t earn you enough and don’t have the same tax benefits. However, it is important to note that any time you invest, you are taking a financial risk. Here’s some things to think about when considering your investment options. Investment options