APMacro: Saving and Interest

power of comp

Money doesn’t grow on trees, but it can grow. It grows when you save and invest wisely. If you want to be wealthy, start by saving and investing regularly. Begin saving now and save as much as you can afford. Pay yourself first by putting money into a savings account, money market fund, or some other investment instrument every time you are paid. Because of the power of compounding, your money will grow big time. Compounding provides an incentive to save and invest early. The benefits of saving and investing when you are young can increase substantially over time when funds are allowed to compound. Compounding means that you earn interest on the interest earned in previous years. For example, if you save $2,000 and earn 8 percent in annual interest, you will have $2,160 at the end of the first year. You will have earned $160 in interest. The second year, however, you will earn more than $160 in interest because you will earn 8 percent of $2,160, not $2,000. This will come to $172.80 in interest, or $12.80 more than the first year. How much difference does this compounding make? If you save $2,000 a year at 8 percent annual interest from age 22 to age 65, you will have saved $86,000 over 43 years. How much money would you have at age 65? You would have a total of $713,899, or $627,899 more than you saved. Think of compound interest as the fertilizer that makes money grow.



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