THE ADVANTAGES OF AN EARLY START
Saving in your youth and the power of compound interest.
Presented by Anthony A. Davidson, Investment Advisor Representative
We’re often reminded to save money for a rainy day, but young people don’t always think in the long-term. While it’s true that many people start investing later in life and enjoy comfortable returns on their investments, one only needs to see a few friends have financial troubles to realize that things don’t always work out that way. Investing earlier in life can sometimes make the difference between retiring when you are ready and retiring when you are able; while you may be healthy well into your senior years, that’s not always guaranteed.
A powerful force. Perhaps the greatest advantage to investing at an early age is the effect that compound interest can have on your savings. A long disputed quote has Albert Einstein claiming that compound interest “is the most powerful force in the universe.” Regardless of who actually said it, there is some truth to the joke.
What makes compound interest special? It is interest based not only on the principal, but from previously accrued interest. In the short term, it’s not terribly impressive, but over thirty years or more, it can produce a handsome dividend.
Great minds have been fascinated with compound interest for generations. Founding Father Benjamin Franklin, who liked to posit that a penny saved was a penny earned, decided to put it to the test. At his death in 1790, he bequeathed £1000.00 each to the cities of Boston and Philadelphia, with intent to build trade schools and public works projects in one-hundred years’ time. Compound interest did the trick, netting $572,000 for those cities in 1891. The fund was closed in 1990, with institutes named for the statesman and scientist earning a $7 million dollar bounty.1
Making it work for you. If you were to place a small sum of money into a bank account that offers compound interest and leave it alone for a long period of time as Franklin did, your money would grow. For example: $100.00 left alone in the bank for thirty years at a 10% annual compounded interest rate would multiply to $1,744.94.2
However, if you were to add money to the account over time, the compounded interest would only grow and could create a very healthy supplement to whatever other retirement plans you may have in place. Say that you started with $1000.00 in an account offering 15% interest; an account you added $600.00 to per year ($50.00 a month). In 40 years, if you kept up your deposits, the account would hold $1,495,435.86.2
Things to consider. These are hypothetical situations; you may be able to contribute more or less money as time goes on. You may find an account that earns a different level of interest. Inflation needs to be considered as well; just as a million dollars today doesn’t get you as far as it did forty years ago, it may not seem like a lot of money once you’re ready to retire.
There is no guaranteed path to financial security, but a young person has advantages that shouldn’t be squandered. A combination of investments, with an eye to the long-term, can make all the difference.
Anthony A. Davidson is a Representative with Securities America, Inc. and Securities America Advisors, Inc., and may be reached at www.wealthhappens.net, 859-245-5880 or Anthony@wealthhappens.net.
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Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc., An SEC Registered Investment Advisory Firm. Davidson Financial Services and the Securities America companies are unaffiliated.
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1 – http://www.laphamsquarterly.org/essays/trust-issues.php?page=all [5/31/12]
2 – http://www.moneychimp.com/calculator/compound_interest_calculator.htm [5/31/12]