THE ADVANTAGES OF AN EARLY START

23 Jun THE ADVANTAGES OF AN EARLY START

Saving in your youth and the power of compound interest.

We’re often reminded to save money for a rainy day, but young people don’t always think in the long-term. While it’s true that many people start investing later in life and enjoy comfortable returns on their investments, one only needs to see a few friends have financial troubles to realize that things don’t always work out that way. Investing earlier in life can sometimes make the difference between retiring when you are ready and retiring when you are able; while you may be healthy well into your senior years, that’s not always guaranteed.

A powerful force. Perhaps the greatest advantage to investing at an early age is the effect that compound interest can have on your savings. A long disputed quote has Albert Einstein claiming that compound interest “is the most powerful force in the universe.” Regardless of who actually said it, there is some truth to the joke.

What makes compound interest special?  It is interest based not only on the principal, but from previously accrued interest. In the short term, it’s not terribly impressive, but over thirty years or more, it can produce a handsome dividend.

Great minds have been fascinated with compound interest for generations. Founding Father Benjamin Franklin, who liked to posit that a penny saved was a penny earned, decided to put it to the test. At his death in 1790, he bequeathed £1000.00 each to the cities of Boston and Philadelphia, with intent to build trade schools and public works projects in one-hundred years’ time. Compound interest did the trick, netting $572,000 for those cities in 1891.  The fund was closed in 1990, with institutes named for the statesman and scientist earning a $7 million dollar bounty.¹

Making it work for you. If you were to place a small sum of money into a bank account that offers compound interest and leave it alone for a long period of time as Franklin did, your money would grow. For example: $100.00 left alone in the bank for thirty years at a 10% annual compounded interest rate would multiply to $1,744.94.²

However, if you were to add money to the account over time, the compounded interest would only grow and could create a very healthy supplement to whatever other retirement plans you may have in place.  Say that you started with $1000.00 in an account offering 15% interest; an account you added $600.00 to per year ($50.00 a month). In 40 years, if you kept up your deposits, the account would hold $1,495,435.86.²

Things to consider. These are hypothetical situations; you may be able to contribute more or less money as time goes on. You may find an account that earns a different level of interest. Inflation needs to be considered as well; just as a million dollars today doesn’t get you as far as it did forty years ago, it may not seem like a lot of money once you’re ready to retire.

There is no guaranteed path to financial security, but a young person has advantages that shouldn’t be squandered. A combination of investments, with an eye to the long-term, can make all the difference.

Kevin M. Nast is a Financial Planner with Transamerica Financial Advisors, Inc. in Northville, MI 48167. He may be reached at www.Map2Finance.com or 248.347.1888. Kevin services clients in Novi, MI 48374 and the surrounding metro Detroit area as well as 10 additional states across the US.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

This is a hypothetical example for illustrative purposes only and is not intended to represent any specific investment. It does not consider any costs associated with investing.  The example is based on compounding a fixed rate of return over a long period of time. However, most investments generate fluctuating returns and an investor may incur a profit or a loss.  Seeking higher rates of return involves greater risk. 

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Citations.

1 – http://www.laphamsquarterly.org [5/31/12]

2 – http://www.moneychimp.com [5/31/12]