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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:

https://www.investopedia.com/calculator/fvcal.aspx

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All articles herein are presented as an educational resource and should not be considered as professional financial or individualized investment advice. Readers should always exercise their own judgement when making any decisions about their money.

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