Finance Flash Go! Episode #22: Time and Compound Interest

This episode of the Finance Flash Go! podcast is all about the magic of compound interest.

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Compound interest is magic. In fact, Einstein has been quoted as saying it is the most powerful force in the universe. It never rests. Compound interest can be working against you or for you. It works against you in the form of interest on debt. It works for you in the form of yield or return on investments. Therefore, the sooner you can have it stop working against you by paying off debts and get it working for you by investing wisely, the sooner you will reach financial freedom!

Tell me more about this “magic”….

How magic is it? Well, if you invest $25,000 a year starting at age 25, planning to retire at age 60, and get a 7% annual net yield, you will have $3.5 million at age 60.

If you did the same thing but started at age 35, ten years later, you would only have $1.5 million at age 60.

That’s a $2 million difference!

Does that not seem like THAT big a deal? Well, based on the 4% rule for safe withdrawals in retirement, you will be living on an annual “salary” of only $60,000 with a nest egg of $1.5 million versus a safe annual withdrawal of $138,000. That is a big difference.

What does this mean exactly?

So, this is to illustrate that the sooner you take advantage of compound interest in your favor, the better off you will be. In fact, when you start earlier, the amount that you save is way more important than the return rate that you get from your investments. And the amount you save is 100% absolutely under your control! Towards the end of your savings career, return rate becomes more important if you had not started saving earlier. So, make it a point to start learning about the different investment vehicles out there that can help you start taking advantage of compound interest right now!

I really hope that you all enjoy the Finance Flash Go podcast! We plan to release a new episode every weekday answering important finance questions. If you ever want to submit a question to our podcast, send an e-mail to [email protected].

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