Start today, you won’t regret it: The power of compound interest

You’ve seen the news. A recent CBS story reports that Millennials have net worths 40 percent less than Gen-Xers did in 2001 and 20 percent less than Baby-Boomers did in 1989. Supposedly we’re the first generation that is financially worse off than our parents. Savings rates are down, credit card debt is up, but there’s an easy solution to building net worth.
Start Saving…and investing… NOW!
I’m sure all of you are familiar with Warren Buffett. He’s pretty much the richest dude alive. He filed his first tax return in his early teens and started picking stocks in his early 20s. Of all the titles he could have chosen for his biography he chose the name “The Snowball.”
No, he didn’t enjoy playing with snowballs as a kid. The title is a metaphor. If any of you grew up playing in the snow you’re familiar with the fact that snowballs get bigger as you roll them down a hill. They start small but the more ground you cover the bigger they get. Until they are huge! The same applies to wealth.
So lets take a look at the chart below (Credit Darwin’s finance).

The power of compound interest over time (Credit Darwin’s Finance)

Let’s assume that you’ll get about 8% return on every dollar you invest (which is about what the stock market has returned since its inception) and the chart above holds true.
If you’re sitting here today thinking about starting to invest your money or go blow it on a new truck, X-Box, or awesome set of speakers, take a close look at the chart above.
If you start saving at 25 (which I’m sure some of you are even younger than that) and save $5,000 a year for the next 10 years you’ll end up with more money at age 60 than if you start saving $5,000 a year from age 35 to 60. And not just a little bit more. Almost $200,000 more! That’s a lot of trucks, X-Boxes, and speaker systems.
Look at the total dollar value invested in each scenario swell. In the first scenario, you only invest $55,000 compared to $130,000 in the second. That is the power of the snowball effect. Compounding interest or investment returns are a powerful thing. Every year the snow ball gets bigger and bigger as it rolls down the hill.
If you’re on the fence about investing and don’t know where to start, stay tuned. The next few posts will talk about the options available to you in the military through the thrift savings plan and the power of indexing.
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