Compound interest is one of the most exciting financial phenomena.
Why? It’s earning interest on interest!
Get 10% annual compound interest and your $ 100 will turn into $ 110 after the first year (+ $ 10), $ 121 after the second (+ $ 21), and $ 133.10 after the third (+ 33.10 $).
Note that the amount of interest you earn each year increases exponentially. It can lead to amazing things, with enough time.
Assuming an annual interest rate of 7.5%, you would become a millionaire in under 38 years just by paying $ 100 per week.
Because of the way compound interest – well, compounded on itself – time is the most critical element. With enough time, you don’t have to contribute a lot of money to build real wealth.
Let’s take these concepts and look at how much money you would get through compound interest based on your weekly contributions, interest rate, and duration.
Keep in mind that if you are investing there are costs to consider such as annual fees and taxes. These are just illustrations to help you understand the relationship between time, interest, regular contributions, and wealth.
5% interest rate
Historically, you can invest in a low risk, very conservative portfolio and earn an average annual return of 5% over decades.
Even with a conservative investment approach, by contributing $ 500 per week, you would reach $ 1 million in less than 22 years.
7.5% interest rate
The S&P 500 has historically posted an inflation-adjusted average annual return of around 8%.
At this rate, by paying only $ 100 per week, you would become a millionaire in less than 38 years.
10% interest rate
It is not easy to get 10% annual return for a long time. In fact, it probably requires beating the stock market. This is not necessarily a desirable goal because of the risks involved.
With the right approach, many people can achieve financial freedom in retirement simply by following the market.
But if you can manage to get that kind of return, the chart above is a perfect illustration of how well compound interest really works. With an annual return of 10% and a weekly contribution of $ 500, it would take you under 17 years to become a millionaire!
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The article How to turn $ 100 a week into $ 1 million with compound interest first appeared on Clark Howard.