Last week I wrote about the power of compound interest. I’m following it up this week with a short post of five facts about compound interest that most people don’t know.
Number 1: Time to $250,000 and a Million is Roughly the Same
I know what you’re thinking, how is it possible that it would take the same amount of time to get to a million as it does $250,000? Here’s an example.
Investing $1,000 per month, it takes 11.15 years to reach a little over $250,000 ($250,034 to be precise). Continuing to invest that same $1,000 per month, it would take a little under 11.5 more years to reach one million dollars ($1,011,087 to be exact).
That means it takes roughly the same amount of time to reach $250,000 as it does $1,000,000. Same amount invested, same amount of time, but the magic is in the compounding.
Number 2: Just One Percent Makes a Huge Difference
Think one percentage point doesn’t matter? Think again.
Investing $1,000 per month at a 10 percent return over 20 years equals $756,030.
Change that to 9 percent and you get $669,174.
Over 30 years it becomes even more dramatic. $2,171,321 at 10 percent and $1,782,903 at 9 percent.
Number 3: The Power of Time
I’m one of those late starters, I really didn’t start seriously investing until my 30’s. If I could do it all over again, I would have started way earlier. Here are a few examples to show you why.
Assuming a 10 percent return, a 25 year old who invests $1,000 per month until they are 55 would have $2,171,321. Keep doing the same thing for 10 more years until the traditional retirement age of 65 and she’d have $5,842,222.
Now let’s use the same 10 percent rate of return for someone starting just 10 years later at age 35. She would have $756,030 at 55. At 65, she’d have $2,171,321 which is less than half the amount of the early starter.
Monumental differences for not a lot of years.
Number 4: The Biggest Returns Happen After Many Years
Here’s a scenario of someone who has been investing consistently for 25 plus years. Let’s say they have $1,500,000.
Using a 10 percent return, even if this person never contributed another dime, they would have $3,890,614 just 10 years from that point. Five years after that, they’d have $6,265,873!
Number 5: Doubling Your Money and The Rule of 72
If you want to know approximately how long it takes to double your money, follow the Rule of 72. Here’s how it works: take the number 72 and divide it by the interest rate. The answer is how many years it will take to double your money. Some examples:
- 72 divided by 12 percent equals 6 years
- 72 divided by 10 percent equals 7.2 years
- 72 divided by 8 percent equals 9 years
- 72 divided by 5 percent equals 14.4 years
- 72 divided by 3 percent equals 24 years
The higher your returns, the shorter amount of time it takes to double your money.
