The Power of Compound Interest

by Jeffrey Strain


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Inspiration is often found in the most unlikely places. I received my first lesson in the importance of compound interest and long term savings from a pair of training shoes I bought in high school. To emphasize the point that training a little bit every day could create vast improvements over time, the training manual used an example of the Native American Indians and the pilgrims in the US.

In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.

Taking this concept to small amounts of money in your daily life can produce significant savings for you over time. For example, let's take the change in your pockets at the end of each day. Let's assume that it adds up to about a dollar a day and you place that into your piggy bank. That dollar a day will become $7 in a week and $30 at the end of the month if you continue to empty your change into your piggy bank each day.

At the end of the month, you take this $30 and place it into your Roth IRA (where it grows tax free and can be withdrawn tax free) which earns 10% a year. That dollar a day will be worth close to $68,000 in 30 years and that's just pocket change. Make a few adjustments in your spending habits and look at the results.

Drive your car 28 miles less a week and you have yourself another $68,000 dollars. Take a brown bag lunch and find yourself $136,000 richer in 30 years. Make your own coffee in the morning instead of buying it on the way to work and you can add another $136,000 to your account. Do those simple things plus empty your pockets each day and you will have over $400,000 in 30 years.

It's all in the way you look at the money you are about to spend. It may be just a dollar right now, but for every additional dollar you can invest each month, it can add up to more than $2,200 in 30 years. That's $220 for every extra dime you save and $22 for every extra penny you can squeeze out in savings each month. So the next time you're walking down the street and you see a penny on the ground, don't think of it as a penny. Pick it up, place it into your piggy bank to invest and congratulate yourself for finding $22 for your future.


Jeffrey Strain is owner of www.savingadvice.com - a website dedicated to saving you money. Copyright Jeffrey Strain.

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