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Can Compound Interest Help You Become Rich

Can Compound Interest Help You Become Rich

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Published by Richard Boettner
Many people have probably read the advice that compound interest can make you a lot of money. True, you can, but you have to leave that money in an investment to do so. Learn how compound interest will grow your investment and with the Rule of 72 just long it will take. Investment advice for the rest of us.
Many people have probably read the advice that compound interest can make you a lot of money. True, you can, but you have to leave that money in an investment to do so. Learn how compound interest will grow your investment and with the Rule of 72 just long it will take. Investment advice for the rest of us.

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Published by: Richard Boettner on Jun 18, 2009
Copyright:Attribution Non-commercial


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Can Compound Interest Help You Become Rich?
by Richard BoettnerEver dream of being rich?Think its impossible for an ordinary person to become amillionaire?If you start when you are young, in your twenties, it isnot that difficult to amass your very own fortune. Let'sassume you just graduated from college at 22 years old. Ifyou were to invest just $100 each month in a mutual fundthat pays 10% interest each year (the average yearly returnof the stock market over time), you will end up with about$865 thousand by age 65. The 10% return each year is whatyou could expect if you invested in a no-load Index Fund.Not bad. So, for about $25 a week, or about $3.57 a day,you could end up nearly a millionaire when you retire.However, if you were to contribute $5,000 a year to a RothIRA you could end with a little more than $2.5 million.For about $13.75 a day, you can amass a small fortune foryour retirement. Investing in a Roth IRA is a smart movebecause when you retire it is tax free.Some people are not comfortable with the stock market'sfluctuations. For those people if they were to put theirinvestment in a Bond Fund or CD paying about 5% each year,they could end up with over $600 thousand in theirretirement fund.A classical example: If you invested $10,000 for 43 years(65 – 22= 43) at 10% without ever adding another penny, youtoo could end up with over $600 thousand in your retirementfund.An excellent example how much more money you can amass byinvesting in a higher yielding investments. In the CD
example, the total investment would be $172 thousand. Inthe second example the investment is just $10,000. Yet,despite the amount invested the outcome is virtually thesame, $600 thousand.The exact quote escapes me but, Einstein called compoundinterest a great wonderment, certainly a power to utilize.Time and the power of compound interest is all you need asthey are on your side. If you are in your twenties and atall want to be rich, do whatever you have to scrapetogether the contribution needed to fund your Roth IRA asquickly as possible. Every day you procrastinate is anotherday your money is not working for you earning interest andcompounding over time.So many people in their twenties, and even in theirthirties, think they need money for more stuff in theirlives; a new car, jewelry, expensive vacations, boat orTV’s and DVD player with surround sound. On top of all thatstuff you have bought on credit you have education loans,children to raise and a mortgage to pay off. But, if youreprioritize your life sticking to a budget early on andcontribute about $15.00 a day, or $450 a month, it isdoable, although you may have to cut back here and theretaking out some wants for necessities.Consider this, most people will spend their entire livesowing other people a fortune in debt paying them interestfor having borrowed other people’s money – the creditindustry. Then, when it comes time to retire, all they haveto show for a lifetime of labor is a pile of debts. Theyend up with a lot of stuff, material things, which end upbeing sold off to fund their retirement, including theirhome with a reverse mortgage.If instead you decide to be smart and to save and invest,other people pay you to use your money. It’s certainly alot more fun to see your money working very hard for youhelping you become rich instead of working hard for yourmoney. It's like having another job without having one.Another way to think about it is: what you spend today
effects your future. Spending money today means you willnot have it tomorrow and you will end up poorer for it. Ifyou were to buy a used car instead of new one, you couldsave lets say $10,000. If that $10,000 would be investedand allowed to grow you would end up with about $600thousand, as demonstrated above, by 65 if invested in aRoth IRA account.The money you spend today on a new car, this years model,will cost you $600,000 and the car has long since beenrecycled or may sit rusting on some lot. Every purchase youmake is important, not just a car. Purchases to keep upwith the Joneses like following fashion trends, weekly hairstyling or cuts, top of the line cloths for work whensomething less expensive will do, and so on. You don't needa new ring tone to show off to your friends. If instead themoney you saved can earn you interest with which you canreally show off to your friends at how your building wealthand they are not. Things don't last, investments do, andthey can grow to a small fortune.
The Later You Start The Harder It Gets To Build Wealth
It is true, the sooner you start the better, although it isnot altogether impossible if you have still some timebefore you retire. The older you are the harder it gets tobuild wealth. The time needed for compound growth to reallykick in is too short.If you wait until you’re 32 and invest $5,000 at 10% in aRoth IRA account, you would have about one million. This isstill a respectable amount it is not the two million if youhad started ten years earlier. At 42, you would onlyaccumulate about one third that amount or about $400thousand. By the time you are 50 you will end up with about$200 thousand by age 65.Social Security is not going provide a comfortableretirement, it is in jeopardy of collapsing altogether –the largest ponsi scheme ever at its worst (new investorspaying into a system that pays out to older investors). It

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