How saving $1 a month can become $1500 in the future (Compounding Interest)
The first time I learned about compounding interest, I thought: Why hadn’t anyone told me this before!?
It was brilliant.
You just set aside money, and watch other people (banks) pay you for the privilege of using it.
This is truly how the rich get richer — the more money you have saved away, the more money people pay you to use it while it’s sitting there.
Scenario: $1 a month
If you saved $1 a month ($12 a year) and invested it, this is what you’d get at a 5% rate of return, which includes the money saved:
10 years = $155.93
20 years = $412.75
30 years = $835.73
40 years = $1532.38
$12 a year, can turn into $1500 and some change in 40 years.
Scenario: $100 a month
Now imagine if you saved $100 a month ($1200/year) and invested it?
At a 5% rate of return you would have:
10 years = $15,592.93
20 years = $41,274.63
30 years = $83,572.64
40 years = $153,237.86
*I chose 5% because it’s very conservative. Most planners may go with 7% or 8% but I like to err on the side of caution.
Even today, I have about $50,000 sitting as a very hefty emergency fund to take care of any situation, and at 2.5% interest, I can expect to make about $31,930 in interest in 20 years.
That means I am being paid about $1600 a year for the use of my money.
Sure, it isn’t the 5% I have listed up there, but it’s my emergency fund, which is why I need it to be in a very safe place in case I need to access it.
Regardless, this is more just to show you how saving even just $1 a month can make a difference at the end of a period of time.
The more you save, the more money you will have, and the more money people will give you!
It’s a win-win situation all around.
Saving doesn’t have to be that difficult.
It’s more the act of being conscious and aware that you need to save, that is difficult. It can make you put down that new gadget you were eying in the store and say to yourself: No. I don’t want to put my future into jeopardy for what is essentially an expensive toy.
Just set aside whatever you can each month and make it a habit to do so. Once you earn more income or are able to put more into savings because your debt is gone, then ramp up your savings until you feel comfortable.