Can Compound Interest Help You Become Rich?

Ever dream of being rich?

Think its impossible for an ordinary person to become a millionaire?

If you start when you are young, in your twenties, it is not all that difficult to amass your very own fortune. Let's assume you just graduated from college at 22 years old. If you were to invest just $100 each month in a mutual fund that pays 10% interest each year (the average yearly return of the stock market), you will end up with about $865 thousand by age 65. The 10% return each year is what you could expect if you invested in a no-load Index Fund. Not bad. So, for about $25 a week, or about $3.57 a day, you could end up nearly a millionaire when you retire.

However, if you were to contribute $5,000 a year to a Roth IRA you could end with a little more than $2.5 million. For about $13.75 a day, you can amass a small fortune for your retirement. Investing in a Roth IRA is a smart move because when you retire what you withdraw is tax free.

Some people are not comfortable with the stock market's fluctuations. For those people if they were to put their investment in a Bond Fund or CD paying about 5% each year, they could end up with just over $600 thousand in their retirement fund.

A classical example: If you invested $10 thousand for 5 years at 10%, then without ever adding another penny, you too could end up with over $1.8 million in your retirement account. This is an excellent example how much more money you can amass by investing in a higher yielding investments.

I do recognize that not everyone will be able to put aside ten thousand for five years. But, you should put aside as much as you can while the less you invest each year will take you longer to have similar returns. If you can invest two thousand each year means you will have to do so for forty plus years to have similar returns.

The exact quote escapes me but, Einstein called compound interest a great wonderment, certainly a power to utilize. Time and the power of compound interest is all you need as they are both on your side. If you are in your twenties and at all want to be rich, do whatever you have to scrape together the contribution needed to fund your Roth IRA as quickly as possible. Every day you procrastinate is another day your money is not working for you earning interest and compounding over time.

So many people in their twenties, and even in their thirties, think they need money for more stuff in their lives; a new car, jewelry, expensive vacations, boat or TV’s and DVD player with surround sound. On top of all that stuff you have bought everything on credit while you have education loans, children to raise and a mortgage to pay off. But, if you reprioritize your life sticking to a budget early on and contribute about $15.00 a day, or $450 a month, it is doable, although you may have to cut back here and there taking out some wants for necessities.

Consider this, most people will spend their entire lives owing other people a fortune in debt paying them interest for having borrowed other people’s money – the credit industry. Then, when it comes time to retire, all they have to show for a lifetime of labor is a pile of debts. They end up with a lot of stuff, material things, which end up being sold off to fund their retirement, including their home with a reverse mortgage.

If instead you decide to be smart and to save and invest, other people pay you to use your money. It’s certainly a lot more fun to see your money working very hard for you helping you become rich instead of working hard for your money. It's like having another job without having one.

Another way to think about it is: What you spend today effects your future. Spending money today means you will not have it tomorrow and you will end up poorer for it. If you were to buy a used car instead of new one, you could save lets say $10,000. If that $10,000 would be invested and allowed to grow you could end up with several thousand dollars in a Roth IRA account.

The money you spend today on a new car, this years model, could cost you $600,000 and the car has long since been recycled or may sit rusting on some lot. Every purchase you make is important, not just a car. Purchases to keep up with the Joneses like following fashion trends, weekly hair styling or cuts, top of the line cloths for work when something less expensive will do, and so on. You don't need a new ring tone to show off to your friends. If instead, the money you saved can earn you interest with which you can really show off to your friends at how your building wealth and they are not. Things don't last, investments do, and they can grow to a small fortune.

So, the answer to the question: Can Compound Interest Help You Become Rich? Yes, but only if you invest for the long-term.

If this website helped you find your financial future we ask you to please give as a way to say Thank You. Not only does it support this site, is is a way to give it forward so others may find their way toward financial security. Please consider giving today. Thank You.

top of page