The Beauty of Compound Interest/Compound Returns.
Even in today’s environment when investment returns are historically low, investing early has a huge impact on future value of investments. Take the example of $1,000 invested at age 20 versus $1,000 invested at age 40. With an return of 7%, that $1,000 invested would be worth $5,427 for the 20 year old at age 65 and $21,002 for the 40 year old at age 65. That’s almost 4X more! That’s the effect of compound interest. The first year the $1,000 invested makes $70 (at 7%). The second year , the return is calculated based on the original $1,000, plus the $70 that was earned the first year. So instead of the $70 return in the second year, the return is $1,070 X 7% = $75. In the 3rd year, the return is $80. So, by year 20, when the 40 year old is just putting their $1,000 to work, the 20 year old is making $271 that year, compared to $70 for the newly investing 40 year old. The compounding is shown below:
You can also play with this yourself using the link below: