By: Shawn Dye, Trust Officer
Saving early will help you take advantage of compounding interest, something Albert Einstein called the 8th wonder of the world.
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
In fact, let’s look at a practical example of compounding interest and just how powerful it can be.
First, let’s look at Ben, who is 25 years old.
Let’s say Ben saves $3,000 annually, starting at age 25, and he does this for 10 years. After 10 years of saving, Ben never saves another dime toward his retirement.
Then, we have Arthur, who is 35 years old and has not saved anything up to this point. But, Arthur decides to get started now and saves $3,000 each year from age 35 until he retires.
Let’s finally assume that both Ben and Arthur retire at age 65 and both earn an annual rate of return of 7%. By age 65 Ben would have contributed $30,000 out of his pocket and his retirement account would be worth $361,242.26. (again, assuming a 7% annual return2).
Shockingly, Arthur would have contributed $93,000 to his retirement account, and at 7% annual return, his portfolio would only be worth $327,654.45 at age 65, even after contributing triple the amount that Ben did!
How can this be? The answer is compound interest and time. Don’t Procrastinate!
For questions and help in starting early to invest, contact Shawn Dye, Trust Officer, at First Western Bank & Trust at 701-551-1352 or email@example.com