Starting to save for retirement or long term goals early gives women a big advantage. Compounding allows even beginner investors to build larger nest eggs from modest early savings. Here’s how compounding works.
Compounding occurs when the earnings of invested funds start to earn also. This creates a third part to the money-growing engine. Compounding happens when investments have the benefit of time to grow. It can be an exponential way to grow your investments over the long term.
For example, starting with $30,000, what does it take to grow it ten times larger to $300,000? If you put $30,000 into an investment that grew at 6.5% annually, compounding monthly, and left it there for 36 years with no added contributions, you’d end up with over $300,000.
The earnings on the earnings will greatly exceed your original contribution. This is the magic of compounding–to reach large sums, you only need to save smaller amounts early on and let time do its work. Of course, women also need to hold appropriate investments that provide growth, rather than just standing still.
Are you a parent or grandparent of small children? Compounding can turn small but steady savings into funds for a college education.
If you’re in your 20s, 30s or 40s in age, you can make a big difference to your future by saving regularly. Even starting at a later age, and giving your money at least two decades to grow, will help.
In our example above, $30,000 could be reached in about 8 years by putting aside $250 per month at 5% compounded monthly. Find a monthly savings goal that’s comfortable for you, and get started on your own plan.
Go to the savings tools at Bankrate.com and do “what if” scenarios to see how far you can get with modest monthly savings. You might be surprised!
Robin Applegarth CRPC®