In my grade 10 math class I was introduced to the concept of compounding interest. Our teacher showed us what happens when we put away $50 a week. She told us we’d be millionaires by the time we would retire.
Ahh, if only I had listened to her then.
We live. We learn. We get started late. And here we are.
If you’re anything like me, you’ve probably already fiddled around with a bunch on online calculators and drafted up various projections for your future. They’re great planning tools to help turn the nebulous concept or retirement into something concrete and actionable.
They’re also good to illustrate certain principles, like compounding. I like to use them to remind myself how the magic of compounding works.
For example, below I’ve used a simple scenario of a lump sum investment of $20K with no further contributions, and an interest/rate of return of 5% per year. (From Compound Interest Calculator | GetSmarterAboutMoney.ca.)
- At the end of 10 years, you’d have $32,940
- At the end of 20 years, you’d have $54,252
- At the end of 30 years, you’d have $89,354
- Which means that at the end of 30 years, the total interest you’ve earned is over $69,000, which is over triple what your initial investment was
The biggest factor in this scenario is time. The longer you have, the better shape your investment will be in.
Personally, I find it interesting and reassuring to look at graphs and projections like these. Obviously, in the real world, the trajectory won’t be a smooth upwards slope, but will be much more variable–ups and downs with a general trend toward growth. And that’s another aspects of investing I’m getting used to: weathering the ups and downs.
Happy saving,
Squirrel
