Want to retire as a Millionaire? As Warren Buffett might say, “It’s Simple, but never easy.”
Dave Ramsey, the leading expert in helping others to build wealth has an illustration he shows in his classes, to show how Compound Interest works. Dave uses the example of Ben & Arthur. (Why not Ben & Jerry? Just kidding!) http://www.daveramsey.com/etc/cms/index.cfm?intContentId=64
In the example, Ben starts at age 19 and invests $2000 per year at 12% (Well, an AVERAGE of 12%). Ben does this from Age 19 to Age 26 (8 years or a total of $16000 invested) and then stops. He lets the money compound and continues to earn 12%. At Age 65, assuming he never withdraws anything, Ben has $2,288,996.
Arthur, on the other hand, waits until he is 27 to get started, and also invest $2000 per year at 12%. Amazingly, even though Arthur invests a total of $78,000 over 39 years, and is getting the same return, he NEVER catches up with Ben, because Ben started earllier. Arthur’s total at Age 65 is $1,532,166. I think many people would be happy with that number though.
Compound interest teaches us a few things.
1. Start early. The eariler you grasp this concept, and apply it for yourself the better.
2. Start now. Don’t worry about the past. Make a plan to start today. And STICK TO IT.
3. Down Markets will happen. With disciplined investing (By the way, $2000/year works out to less than $40/week.) you are buy at a bargain when values are down. The catch is to do it every week.
4. Compound interest is either working for you or against you. Is it time to do “plastic surgery” on your credit cards?