Compound interest is one of the most exciting financial phenomena out there.
Why? It’s earning interest on interest!
Get 10% in annual compound interest, and your $100 will turn into $110 after the first year (+$10), $121 after the second (+$21) and $133.10 after the third (+$33.10).
Notice that the amount of interest you earn each year increases exponentially. That can lead to some amazing things, given enough time.
Assuming a 7.5% annual interest rate, you’d become a millionaire in less than 38 years simply by contributing $100 per week.
Because of the way compound interest — well, compounds on itself — time is the most critical element. Given enough time, you don’t have to contribute much money to build true wealth.
Let’s take these concepts and look at how much money you’d get via compound interest depending on your weekly contributions, the interest rate and the amount of time.
Keep in mind that if you’re investing, there are costs to consider such as annual fees and taxes. These are only illustrations to help you understand the relationship between time, interest, regular contributions and wealth.
5% Interest Rate
Historically, you can invest in a low-risk, highly conservative portfolio and average a 5% annual return over decades.
Even with a conservative investing approach, by contributing $500 per week, you’d reach $1 million in less than 22 years.
7.5% Interest Rate
The S&P 500 historically has averaged an inflation-adjusted annual return of about 8%.
At that rate, by contributing just $100 per week, you’d become a millionaire in less than 38 years.
10% Interest Rate
It’s not easy to achieve a 10% annual return for a long period of time. In fact, it probably requires beating the stock market. That’s not necessarily an advisable goal due to the risks involved.
With the right approach, many people can achieve financial freedom in retirement simply by tracking the market.
But if you do manage to achieve this type of return, the table above is a great illustration of how effective compound interest really is. At 10% annual returns and a $500 weekly contribution, you’d need less than 17 years to become a millionaire!
More Money Tips From Clark.com:
- How To Calculate Compound Interest
- How To Become a Millionaire With an IRA
- How To Retire a Millionaire With a 401(k) Plan
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