The Power of Compound Interest
The Secret to Saving
One of the best-kept secrets about saving money is the power of compound interest. Here’s how it works...
How Interest Grows Over Time
Your financial institution pays you for keeping your money in its savings or money market account. This is called interest, and it is added to your savings at regular intervals. If you don't touch the interest, but let it add up along with what you deposit, you start to earn interest on your interest, as well as on the deposits you make. This is called compound interest. Start Early
The sooner you start to save, the greater the benefit of compound interest. Take a look at the difference compound interest makes…and the power of starting to save early in life.
See How Much You Could Save
As an example, the chart below shows how much money you could earn by the time you are 65 years old if you invest $10,000 at a 4% rate of return and don’t contribute one dime more. If you invested the money at age 35, you’d earn over $22,000 in interest. However, if you invested that same $10,000 at age 25, by the time you turned 65, the power of compound interest would earn you more than $38,000 in interest. That’d be a full $16,000 more just for investing early and taking advantage of compound interest.
The Time Value of Money — Investing $10,000 |
| Age of Investor |
Amount Invested |
Rate of Return |
Amount of Interest Earned |
Total Amount when Investor Reaches Age 65 |
| 25 |
$10,000 |
4% |
$38,010.21 |
$48,010.21 |
| 35 |
$10,000 |
4% |
$22,433.98 |
$32,433.98 | |
The Rule of 72
Simply Divide by 72
The Rule of 72 is a handy way to determine how long it will take to double your money. Simply divide 72 by your rate of return. In the example above, divide 72 by 4 to get 18. That means it will take 18 years for the investment of $10,000 to double.