The Science of Compound Interests (2)

After discussing the perks of compound interests last week, let us look into more real life examples today - 2 fresh grads who have just started their careers.

Example A:

1. Started saving early and invested $5,000 at the age of 25

2. Added $2,500 every year for investing until age 65

Example B:

1. Delayed investing until age 35, but chipped in double capital ($10,000)

2. Allocated $5,000 into investment every year until 65 years old

Assuming that the effective annual rate is 7% for both investments, A would be receiving $608,896.21 at 65 years old, and $581,487.76 for B. This may look like an astonishing plot twist - how come B has doubled his investment amount but still resulted in lower earnings in the end? The answer actually depends on compound interests.

Let’s bring in another case study. If we would like to save $1,000,000 for retirement, for every 10 years that are postponed to invest, a double amount of capital would have to be poured in in order to fulfill your goal. On the other hand, if your investment is going to be conducted over a longer span of time (e.g. 50 years), you would just have to invest $2,150 annually that would result in $107,500.

Looking back at this example, the shorter the investment timeline, the higher the capital required per year. If we only start investing 15 years before our retirement, the annual amount would be raised exponentially to $33,800, which sounds unachievable to us stingy savers. Keep in mind that investing early leads you to the way of building retirement funds at ease, without compromising your daily spending pattern. Change yourself for the better, start off with this habit!



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