The Value and Power of Compound Interest
When you’ve been giving financial advice as long as we have you tend to overlook some of the more basic and fundamental principles of finance. One of those basic principles is the concept that $1.00 saved today is going to be more valuable than the same $1.00 saved a year from now or never saved at all.
There are two reasons that this is excellent advice. The first is that a dollar today will buy more goods and services than a year from now because of inflation. The second is that a dollar invested today will earn a return in the form of compound interest tomorrow and thus is going to be more valuable in the future.
The lesson here is that the value of time, when it comes to money, is very high as well as the fact that a big key to financial prosperity is realizing the true potential of every dollar that you make.
Let us give you an easy example to illustrate our point. Let’s say that you have $20 and you’re considering using it to purchase dinner but also considering investing in in your tax-free retirement accounts. While it’s obvious that we all need to eat the $20 that you spend for dinner today, if you invest it for 30 years, can turn into approximately $140 in the future evenafter adjustments for inflation.
That’s a return of sevenfold on your $20 investment. If you multiply that same investment by 10, 20 or 30 you can quickly see that investing your money now is going to give you a huge return in the future. Using time and the power of compound interest you can turn a relatively small amount of money today into a relatively large amount of money in the future.
While we will be the first to admit that there’s no way to invest every single dollar that you make the point we’re trying to pound home is that every single dollar that you do invest is going to make a big difference in the amount of money that you end up with come retirement time.
With that in mind you should make as much effort as you can to save as many dollars today as you can. Many of the tips that we give out regularly here on our blog will save you a dollar here and a few dollars there and, frankly, we get lots of emails asking us what the point is to saving only a few measly dollars.
The point is that compound interest can take those ‘few measly dollars’, if dutifully saved day in and day out, and turn them into a nice little retirement nest egg when you’re ready to quit the rat race. The power of compound interest is extremely strong and if you take those dollars that you’re saving from our tips and advice and put them to work for you we guarantee that your ‘future self’ will be happy that your ‘present self’ took our advice.
Of course we also urge your present self to come back and take advantage of all of the excellent financial advice that will be giving out every day here on our blog. We hope this little one was educational and we hope to see you sometime very soon.
Filed under: Investing
Like this post? Subscribe to my RSS feed and get loads more!