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How Time Can Help You When it Comes to Saving and Investing

July 01, 2019

Tip of the Week

The sooner you can start saving and investing, the more compounding can work for you.

2 min read

Strategies:

Jargon Hack

What is compounding?

Compounding

Compounding is any return earned on your principal, plus your past returns.

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Example:

First, let’s explain compounding. Compounding is essentially a snowball effect involving the interest or earnings your money can make as it continues to earn more interest or some other return over time. For example, if you start with $100 and put $50 a month away for ten years, with an annual return of 5.25%. You’ll have slightly more than $7,800, but you’ll only have put away $6,100. Compounding could add about $1,700 to what you save.

See disclosure.

Now let’s show you how time can work on your side. The sooner you start investing, the more money can work for you through the power of compounding. Notice the difference between how much someone can save by the time they’re 65 if they start at 25, versus starting at 35.

For both charts, we assume you start with $100 and put $50 away each month, with an annual return of 5.25%. The person who starts at 25 will save a total of $24,100 over the next 40 years, compared to the person who starts at 35, who will save $18,100. 

But the person who starts at 25 will end up with nearly twice as much money, just for starting ten years earlier. 

By starting early, the person who starts at 25 will save $24,100 by the time they’re 65. Compounding will add an additional $53,732, for a total of $77,832.

See disclosure.

By starting later, the person who starts investing at 35 will save $18,100 by the time they’re 65. Compounding will add $23,981.88 for a total of $42,081.88

See disclosure.

As you can see, the person who starts ten years earlier winds up with nearly twice as much money, even though they only save $6,000 more dollars. The extra money that the person who invests for longer could wind up with is all thanks to the power of time and compounding. 

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Make saving and investing a habit.

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Make saving and investing a habit.

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By Stash Team

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Disclaimers

Graph disclosure *Source: https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator

Expected returns or probability projections are hypothetical in nature and may not reflect actual future results.This is a hypothetical illustration of mathematical principles, is not a prediction or projection of performance of an investment or investment strategy, and assumes weekly contributions at an annual rate of return (compounded annually) and does not account for fees or taxes. It is for illustrative purposes only and is not indicative of any actual investment. Actual return and principal value may be more or less than the original investment. The rate of return on investments can vary widely over time, especially for long term investments including the potential loss of principal. For example, the S&P 500® for the 10 years ending 1/1/2014, had an annual compounded rate of return of 8.06%, including reinvestment of dividends (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). The S&P 500® is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.

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