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Using Compound Interest To Prevent Debt

Compound Interest is a superb tool for all investors, no matter your age. In fact, for younger people looking to save for retirement or even other things that may come for them down the road, compound interest is even more powerful tool, as it's real secret is in the time you have. This is why it is more important than ever to get a retirement plan going for yourself as soon as is possible. Even if this means just small amounts, starting today will begin the wheels turning to a superb retirement savings.


Starting today is critically important for young people, as their best weapon is time. While younger people tend to receive smaller salaries, their contributions can quickly build, as compound interest will increase the total yearly.


Compound Interest In Action!

Compound interest is the effect achieved by a combination of a principle, a positive interest rate and the addition of time. Over a long period of time at a positive interest rate, even a small amount of money can turn into something quite large. As a good example, let's take a 25 year old man who has decided that it is time to retire. We will assume for this example that this gentleman can afford to contribute $100 per month, which brings us a total of $1200 for the year. The common assumption by most investment professionals is that a good annual rate of return to expect is 8%. So, if we say in this example that he will retire in 35 years, we can also say that the original $1200 will be worth $17,741. Which is a nice chunk of change.


Also, consider what might happen if he continued to invest $1200 into this plan every year with the same rate (8%), over 35 years. Over that time, his total contribution will be: $42000 out of his pocket. Not bad. But in 35 years, that $42,000 will have grown to $241,064.99. Which is excellent! If he was going to retire in 25 years, meanwhile, that $241,000+ will dwindle to $102,963.47. So you can see why starting right away is always the best idea. Time is money. Lots of it.


We All Have To Retire

No matter how much we would prefer not to, we all have to retire sometime. So when this inevitable (and often welcome) time comes, you should definitely make sure you have the financial resources to live the way you want to. When retired, living off of credit is simply not an option. At this time of your life, debts are more crushing than at any other point. Your best bet - fight against this fate by starting a retirement plan today. With compound interest and time on your side, you simply cannot lose.


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