Compound Interest Examples that Will Rock Your World!
Generation Z and Young Millennials: Claim Your Free Millions
Am I kidding? Not at all. If you’re young and willing to hustle, you really can turn $1000 into $2.6 million. Generation Z is the age bracket to target for capitalizing on insane compound interest gains.
With decades stretching into their horizon, this youngest investment generation has upwards of 45 years before retirement. That’s enough to grow a fortune.
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Who is Generation Z? Most agree they’re the generation born in the mid-’90s and later. They are “Millennials on steroids” according to an article in the New York Times.
Our focus here is on Generation Z, but 20-something Millennials can also reap huge rewards by starting a retirement account now. Without further ado, here’s the scoop on compound interest.
What Compound Interest Can Do in Your Early 20’s
The claim at the beginning may seem like an incredibly propagandist statement. What am I trying to sell you? How on earth can a nineteen-year-old turn $1000 into $2.6 million?
A couple of conditions: For the $2 million-plus, you must invest when you’re 19-22, with no delay. If you’re in your later 20s or older, don’t stress. You can still grow your $1000 into a nice, sizable sum, and the money that accumulates is still FREE.
The other condition is to do all you can to begin with a $1000 initial investment. Start out with a bang earning your compound interest. Here are a few suggestions that may help you save towards that initial investment, as well as keep those $100 monthly contributions coming in.
If you’re not already using the super simple cash-back app called Ebates every time you shop at places like Amazon, Best Buy, Old Navy, Groupon, Ebay etc. — I literally can’t think of a company that doesn’t partner with Ebates now — you’re missing out on one of the easiest ways to earn money for your investment fund.
Another great thing to consider when you need to come up with some extra cash each month is starting a side hustle. I know, it’s all the rage now — and with good reason. It’s not easy, but it’s doable with the right planning and time management.
More and more people are discovering that their unused talents and skills can earn them quick cash online.
Sites like Etsy and Fiverr make it possible for anyone to market their skills and talents. Can you design graphics, or draw great logos? What about writing or editing papers?
Do some serious brain storming and make a list of skills you have. You may be surprised to see what you come up with.
What is Compound Interest?
This is where it gets exciting. According to Merriam-Webster, compound interest is “interest computed on the sum of an original principal and accrued interest.”
The money you initially put into a retirement account, for example, will earn interest, of course, but so will its interest. Interest that grows its own interest is pretty cool!
Take advantage of this while you’re young and have 40-plus years before retirement. The sooner interest kicks in on your initial investment, the sooner that interest begins earning money as well. Compounding interest can make you seriously wealthy!
Tick tock — every day that you don’t have your $1000 in an account earning that interest is money lost.
“The most powerful force in the universe is compound interest.” Albert Einstein
An Exciting Example of Compound Interest
Are you excited yet?
Here’s a hypothetical example. Feel free to imagine yourself in Susan’s glorious shoes.
19-year-old Susan opened an individual retirement account (IRA) very early. She had $1000 as an initial investment, thanks to some savings and graduation money, and committed to a $100-per-month investment thereafter.
Several decades later, Susan turns 65 and is ready to retire and begin taking withdrawals from her IRA. She’s had 46 years to grow interest on her initial $1000 plus her $100-per-month investment.
The initial investment, plus her monthly contributions, came to a grand total of $56,200 over the 46 years she has owned her IRA account.
Her retirement balance is–drum roll–$2,685,908.81. She has earned a total of $2,629,708.81 in free interest money.
Let that sink in. Susan invested only $100 per month after that first $1000 at age 19. She now has more than $2.6 million to play with.
What Happened With Bill?
Bill is Susan’s older brother. He’s studying finance as a graduate student and aspires to work on Wall Street. Unfortunately, Bill’s high school didn’t offer personal finance. He started an IRA account when he was 26.
With the same initial investment of $1000 and a monthly contribution of $100, after 39 years of growth, he still came out a millionaire. We can’t feel too sorry for him.
His total $47,800 investment, over the 39 years, grew to $1,158,661.53 by the time he reached 65. He earned $1,110,861.53 in free compounded interest. Not too shabby, Bill.
Compound Interest Investment Calculator
You can find several compound interest investment calculators online, including Suze Orman’s website, where you can play with the numbers. They’re great tools to estimate the amount of compound interest you could earn at any starting age.
Experiment with varying amounts of initial investment, along with the monthly contribution you’re willing to make. Plug your numbers into any compound interest investment calculator, and witness the magic of compound interest!
10 Percent Return on Investment (or more)
The calculated earnings from the hypothetical investment stories above are based on 12% average yearly interest. When you open an IRA account, the interest earned, and the number of years your money grows, will determine your end result.
Obviously, the more years you can grow your money, combined with a decent amount of interest that compounds, equals a great recipe for growing wealth.
But is 12% interest realistic? Percentages of return on investment can always vary — but a 10 percent return on investment or even more… is totally doable!
Based on three of my own mutual funds with Vanguard, the growth rates over a five-year period right now are 12.9%, 13.2%, and 17.3%. Money guru Dave Ramsey has a great article about the reality of a 12% interest growth rate.
Mutual Funds Compound Interest
There are dozens of investment types, but the mutual fund is a strong choice when you start an individual retirement account. You’ve most likely heard the term “portfolio.”
Imagine a portfolio of your finest work samples. These are what you want a future employer to “invest in” or take notice of. They have value, and most likely include a diverse array of your best skills.
An investor’s mutual fund is a collection of diverse investment samples that are chosen to bring you value. An easy way to imagine a portfolio is like a pie diagram with various pieces.
A mutual fund may have a variety of small and large company holdings along with a nice mix of U.S. and international businesses.
With a mutual fund, an investor has no ownership of the companies listed in a portfolio. However, they do own shares of the fund invested in them.
Buying mutual funds is a way for many investors to put their money together to take advantage of the earnings of well-performing companies. There is a great variety to choose from as well. High-risk high-return investments are certainly an option if you have a lot of time like most young adults do.
But if you’re more comfortable with moderate risk investments, there are countless mutual funds for compound interest in all different ranges of investment risk.
Benefits of mutual fund IRAs with compounding interest:
- You can get started with only $100
- You don’t need to know anything about the stock market
- Investment companies specialize in these funds so you don’t have to
Best Places to Invest Money Right Now
There are dozens of reputable investment firms to choose from. Here are my top picks, but I encourage you to do some research and find what best fits your needs.
Vanguard’s reputation for dependability, low-cost management fees, and performance is legendary. “94% of Vanguard no-load mutual funds performed better than their peer group averages over the past 10 years.”
No-load funds are mutual funds with no commission or sales fees when you choose to buy and sell. Vanguard’s extremely low management fees and very helpful investment counselors make them an excellent choice for new investors.
The lowest cost fund is the Target Retirement Fund; you can start with $1000. Once you’ve hit $3000, you can choose from Vanguard’s other stellar-performing funds. Vanguard makes it easy to buy or exchange up when you’re ready — all with no FEES!
Charles Schwab is also a great choice for beginners. With 24-hour telephone support and over 3,000 funds with no transaction fees, Schwab is a great contender in the amateur investment scene.
If you don’t have the $1000 to open an IRA at the moment, Schwab will waive that minimum as long as you commit to investing $100 per month.
Automatic bank transfers make this an easy process. And if you leave it in place after reaching that $1000 goal, you’ll knock it out of the ballpark with interest growth.
Generation Z and young Millennials, do everything in your power to fund that initial $1000 — and if you can’t swing that yet, start now with a no-minimum IRA.
If you can only put in $50 per month for a while, that’s better than not starting at all.
When Albert Einstein discovered the formula for compound interest, it was truly one of the greatest mathematical discoveries. With a 10% interest rate, money doubles every 7.2 years. That, my friend, is impressive!