Every time someone would mention compound interest to me and why I needed to start investing, it was almost like I could feel my soul leaving my body ready to return as soon as the conversation pivoted or as soon as it wasn't too rude to change the topic wondering, "I think I nodded and had enough 'hmmms' in there to finally talk about this trip next week." Never in a million years did I think I'd be the one eager to start that conversation and quickly recognize who had genuine interest and whose eyes were glazing over eager to talk about literally anything else.
The reason I started caring is because it finally made sense to me and it became achievable rather than an abstract concept that the ultra wealthy had to think about. Compound interest refers to the interest not only on the principal investment but also on the accumulated interest from your earnings. If you Google "compound interest calculator," you'll get a few options, I like Investor.gov. To put this into practice, let's create 2 scenarios for illustrative purposes. In scenario 1, you invest $200 a month for 40 years with an average stock market return of 9% to get $800K in retirement, below is what that input and output would look like, your total contributions would be $96,000 for 9x return:
Alternatively, contributing $400 a month for 20 years in scenario 2 would reach over $245K. While this illustrates how time is the greatest asset you have and you should start as early as possible, investing is still one of the best ways to accumulate wealth through compound interest contributing as much as possible and increasing as you're able to.
What does this actually mean for you? It means investing is for everyone, if you're able to to contribute $100 a month or $1,000, it will be the consistent, "boring" way to ensure your money is increasing.
Once you've set up a strong financial foundation and are sticking to your budget, created your emergency and sinking funds, calculate how much you feel comfortable investing each month as a much needed next step in your journey. You're already investing if you're participating in your employer sponsored retirement plan and make sure you're contributing at least the employer match as that is essentially free money. Once that's set up automatically and you can remove it from your mental load, think about where the additional funds can go. Consider each investment account, the benefits and consideration each offers and which one makes the most sense for your particular situation in this point in time. If you're comfortable with your retirement trajectory, you can consider an HSA account which you can dip into if there is a qualified medical expense or might feel more comfortable opening up an individual brokerage account which has no withdrawal restrictions or contribution limits, but also has no tax advantages.
Once you have a holistic picture of your portfolio, you'll begin to see how it all works together but understanding compound interest is the first step to internalizing the importance of investing and how reaching a million dollars by retirement age is a lot more feasible than we're taught to believe it is.
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