These 3 Charts Show The Amazing Power Of Compound Interest

retirement_roadMy Comments: Math was not and remains not one of my strengths. But I understand this part. If you are younger than I am and have an opportunity to put some money to work, you need to push the envelope and make it happen.

Whether you do or not, the price you pay for stuff with your money will also increase via the same compounding mechanism, so it behooves you to make sure your savings are growing at least as fast and preferably, much faster. Remember, money is only useful if you can use it to buy the things you need and the things you want.

By Libby Kane July 12, 2014

One of the biggest financial advantages out there is something anyone can access by opening a simple retirement account: compound interest.

Retirement accounts such as 401(k)s and Roth IRAs aren’t just savings accounts — they’re actively invested, and therefore have the potential to make the most of this benefit.

As Business Insider‘s Sam Ro explains, “Compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself.”

So why is that so important?

The charts below will show you the incredible impact compound interest has on your savings and why starting to save in your 20s is one of the best things you can do.

1. Compound interest is incredibly powerful.

The chart below from JP Morgan shows how one saver (Susan) who invests for only 10 years early in her career, ends up with more wealth than another saver (Bill), who saves for 30 years later in life.

By starting early, Susan was able to better take advantage of compound interest.

Chris, the third saver profiled, is the ideal: He contributed steadily for his entire career.

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2. When you start saving outweighs how much you save.

This chart by Business Insider’s Andy Kiersz also emphasizes the impact of compound interest, and the importance of starting early. Saver Emily, represented by the blue line, starts saving the exact same amount as Dave (the red line), but begins 10 years earlier. Ultimately, she contributes around 33% more than Dave over the course of her career, but ends up with almost twice as much wealth as he does.

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3. It can even make you a millionaire.
Compound interest can get you pretty far. In fact, Business Insider calculated — based on your current age and a 6% return rate — how much you need to be saving per month in order to reach $1 million by age 65. You can also see the calculations based on different rates of return.

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