The Power of Compound Interest
Warren Buffett understands the power of compound interest and and you should too. To illustrate the power of saving your money right now as opposed to sometime in the future consider the following illustration.
The following chart illustrates the effect of compound interest over a 40 year time period.
The chart below illustrates 2 different individuals Warren and Fred. Both can invest their money in a investment account which earns 12% per year if they so choose. Both 22 years old have an extra $2000 per year to invest or spend. Warren opens an individual retirement account (IRA) and starts investing. Fred decides to spend his extra $2000.
Fred continues to spend his extra $2000 per year for six more years. After that he decides to invest his extra $2000 per year until he reaches the age of 65. Fred years the same 12% interest a year that Warren does.
Age Warren Fred
22 $2250 $0
23 $4,509 0
24 $7050 0
25 $9896 0
26 $13,083 0
27 $16653 0
28 $18,652 $2,240
29 $20,890 $4,509
30 $23,397 $7,050
35 $41,233 $25,130
40 $72,667 $56,993
45 $128,064 $113,147
50 $225,692 $212,598
The chart illustrates the value of Warren and Freds IRAs, from they time they were 22 all the way to age 65.
An important point to keep in mind is Warrens total investment is $12,000 (($2,000 per ear for the first six years), while Fred's is $74,000 ($2,000 per year for the last 37 years).
In other words after Warren had invested his total of $12,000. He stopped investing and never made another $2000 contribution ever.
The difference in investment between $12,000 and $74,000 is huge, yet they both ended up with the same amount of money. All because Warren decided to start his investment only 6 years earlier.
As you can see, the earlier you start the better off you will be and its never too late to start. The important thing is is that you start now saving now, no matter how large or small the