One Loss/withdrawal Can Completely Sabotage The Magic Of Compound Interest

By Author: Linus
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Albert Einstein referred to compound interest as the strongest force within the universe. It has the potential to transform a monthly savings of only $5,000 into a million dollars.

Exactly how does this happen? When interest is added to the principal amount, the total sum on the original principal as well as the interest turns into the new principal, and interest is then calculated on that total. So essentially, cash saved under compound interest, multiplies itself.

For example, if the interest was compounded yearly and you started out having a $100 investment at a 10% interest rate, you would have have earned $10 interest the first 12 months, and would now have $110 at the end of the initial year.

In the 2nd year, you would earn interest on $110, providing you $11 in interest within the second year, so at the end of the 2nd year you would now have $121, and so on. So subsequently after 20 years you'd wind up with $672.75!

Nevertheless, even compound cannot magically transform $5000 into $1 million overnight. It takes time, so it logically follows that it's under no ...
... circumstances too early to begin planning a retirement fund.

Regrettably, a lot of people tend to forget that, and begin saving too late ─ without understanding that retirement savings are the ultimate emergency fund. The fund will have to take care of all sorts of contingencies including medical expenditures not covered by insurance, in addition to anticipated expenditures including children's weddings and vacation trips.

When investing for retirement, every tiny bit counts. You must remember that your life-style when in your 60s and afterwards will depend entirely on your economic beliefs and how wise you have been with your finances right through your life. After all, retired life is designed to be a precious time to kick back and relax, not to fret about your financial situation when you're not making a monthly income.

Most people who do begin saving for retirement in their 30s experience tremendous temptation to dip into their savings. This is to be avoided at all costs. Even a seemingly tiny excess purchase could take all the enjoyment out of retired living.

Take for instance, the case of twin brothers, Wilbur and Wilfred. The year they turned 30, they both began saving $5,000 each month, at a monthly interest of 8% for their retirement. Hastily, Wilbur gave in to a mid-life crisis, and wound up spending $20,000 on a car for his 45th birthday.

When the twin brothers turned 65, Wilfred had nearly $1 million ($977,553 to be exact) in his IRA account, whereas Wilbur had a little more than $ 650,000 ($651,702, to be precise) in his. So although $20,000 did not appear to be an excessive amount to pay for that car, that one withdrawal resulted in a difference of over $300,000.

Because of this, Wilfred and his wife proceed to fly first class, had plenty of money to pay for their daughter's wedding, and are now considering buying a convertible. Wilbur's retirement savings isn't enough to sustain the lifestyle he is accustomed to. He has had to cancel his country club membership, sold the car that got him into his monetary mess, and is thinking about moving in with one of his kids.

An online savings account is an easy way to pay yourself first. With a money market account your money is working harder for you while still available for longer term projects and needs.