Do you want to become a millionaire?

I know I do. And I’m going out on a limb and saying you do too.

There are two things that make becoming a millionaire easier.

Compound interest and time.

A higher compound interest rate makes you a millionaire faster.

And more time gives you a chance to make more money.

But don’t take my word for it, let’s look at an example.

### What is Compound Interest?

Before we get into an example, you need to know the definition of compound interest.

Compound interest is the fee you earn on your invested money.

The difference with compound interest is it pays you a fee on the fees you earned from the previous year.

For example, if you deposit $100.00 with a bank and that bank pays you 1% interest, you will earn $1.00 in the first year ($100 x .01).

But with compound interest you will earn $1.10 in year two ($101.00 x .01).

With simple interest, you would earn $1.00 in year two ($100 x .01).

### Calculating the Change Compound Interest Will Make

Alright, time for the meaty example.

For our example let’s pretend you start investing for retirement at age 30.

And you plan on retiring at age 60.

That gives you 30 years to invest.

Let’s also pretend you invest $500 per month religiously during those 30 years.

Finally, let’s use an interest rate of 8%.

When you turn 60, you would have $745,179.72 in the bank.

Not bad!

But what if you earned 9%?

You would have $915,371.74 at 60. That’s a $170,192.02 increase just for an increase of 1.0% in the compound interest rate.

That’s a lot of money.

### Time

There’s another factor to consider: time.

It will have an even bigger impact.

Let’s pretend instead of starting at 30, you start at 20.

This gives you 40 years of compounding interest.

And just to make it fair on our 30-year example, you decide to stop investing $500 when you hit 50.

This way you invest the same amount of money over 30 years and the only thing that changes is time.

The additional 10 years at 8% compound interest gives you $1,654,030.90.

That’s $908,851.17 more than the $745,179.72 that 30 years gave you.

That’s almost a million dollars itself!

But what if you get 9% compound interest for 40 years?

It gets even better. You get $2,243,903 after 40 years.

That’s really a lot of money!

### Summary

Compound interest is a powerful tool.

This example showed us that.

And most important thing when it comes to compound interest is time.

That’s great because it doesn’t take skill to have more time.

You don’t need to be an investment guru to make millions.

But the cruel thing is you can’t get more time.

No one can.

So use this information wisely.

Start investing today. Don’t wait another month.

Even if you can’t afford to invest, find a way.

I started investing at 22, when did you start investing?

Click the link to return to Finance Footing home.

## Leave a Reply