subject: Compound Interest Tips Everyone Should Know [print this page] Compound Interest Tips Everyone Should Know
Albert Einstein once declared that compound interest to be "the most powerful force in the universe." And another time he claimed compound interest to be the eighth wonder of the world. So I would suggest that you take a few moments to really understand compound interest. You absolutely have to know what getting the best interest rates on savings can do "for" you and what savings interest rates can do "to" you. I think if you asked most people they would admit that they could probably save an extra $10, $20 or $30 per month if they had to. David Bach has coined the term "Latte Factor" when you talk about being a little more careful at what you spend every day so that you can save a little more.What of the other ways of keeping more money in your pocket? That car loan that you could get through the bank instead of the consumer loan company could save you 2% or 3 % on the interest payments. You could ask for a better mortgage rate and many times you will get it. And what about paying those bills and that credit card off on time to avoid the interest payments, or using a line of credit with a lower rate to pay the card off. It takes just a small extra amount of effort to make these things happen but because the savings are small many will not put out the effort. You may be asking yourself what this has to do with compound interest. Well, if you didn't save that $100 this year, you have lost. Lost a $100 plus the interest for the remainder of your working life, not to mention the interest on the interest.You see, if you don't save that $100 a year, you will lose that return on your investment each and every year! So in say 25 years if that $100 was invested at 8% you would have lost $7500. $100 doesn't seem like much but can you afford to lose that $7500? Now let's look at how the savings interest rates affect your savings. Let's look at $1000 invested for 36 Years. At 4% interest on savings, you would end up with $4,100. At 8% savings interest rate, you would end up with $15,970. At 12% interest on savings your investment would be worth $59,136. Oh what a difference the increased interest rate makes. Do you really think you are playing it safe investing at lower rates? I guarantee you; your banker will love you for doing that.Now let's look at what happens when you make it a habit of having a regular savings program. That $1000 Invested every year starting 36 years back would end up at $73,650 at 4%. If invested at an interest rate of 8% you would end up with $172,320. At 12% you would end up with $431,660. The difference between 8% and 12% savings interest rates is $259,340 and that is the difference between real security and living had to mouth.Now let's get our savings calculator out and look at a scenario of where instead of investing $1200 each year you managed to increase your savings to $1500 each year. Let's say you start at age 40, $1200 per year at 9%, which might be at the current interest rate on a particular investment, at age 60 you would have $61,392. But if you saved $1500 at a slightly higher rate of 10.5% at age 60 you would end up with $90,946. That's almost $30,000 more. What are the best interest rates on savings that you could find if you tried a little harder? Who could you ask for investment advice?So think about it - what does compound interest mean to you? Maybe it's time to get your retirement calculator out and see.
