The Power of Compounding Returns: Save $100,000 before you are 30 and you are set

By | November 20, 2015

Want to know the power of compounding returns? Einstein called compounding interest, “the greatest mathematical discovery of all time”. As far as I can tell, money is a renewable resource. A lot of money will make more money, as long as you have time.

 

 

 

 

I will present to you two scenarios that will instantly show how time, interest, and compounding interest can increase money quite rapidly.

Scenario 1:  You are a 22 year old person with a plan to be rich. You know the power of compounding interest and make it a habit to save early. That is why you have made it your goal to save $100,000 by the time you are 30 years old and stop. This means that you will need to put away a little more than $12,000 every year (or save $1,000 a month) until you reach 30 in a cash account. However, you can only afford to put down $8,000 a year but are okay with taking on more risk and instead of putting it in a bank account, you wisely invest it in the stock market and hope to achieve that average return of 8%.

Scenario 2: You are the older brother of this bright 22 year old, and at age 30, you are also thinking about saving. That is why you have also decided to save $8,000 a year until you retire at age 70. Like your younger brother, you can take on more risk and will invest your money in stocks hoping to reach that 8% return each year.

Rate of Return 8%
Age Contribution
22  8,000  8,640 22  –  –
23  8,000 17,971 23  –  –
24  8,000 28,049 24  –  –
25  8,000 38,933 25  –  –
26  8,000 50,687 26  –  –
27  8,000 63,382 27  –  –
28  8,000 77,093 28  –  –
29  8,000 91,900 29  –  –
30  8,000 107,892 30  –  –
31  – 116,524 31  8,000  8,640
32  – 125,846 32  8,000  17,971
33  – 135,913 33  8,000  28,049
34  – 146,787 34  8,000  38,933
35  – 158,529 35  8,000  50,687
36  – 171,212 36  8,000  63,382
37  – 184,909 37  8,000  77,093
38  – 199,701 38  8,000  91,900
39  – 215,678 39  8,000  107,892
40  – 232,932 40  8,000  125,164
41  – 251,566 41  8,000  143,817
42  – 271,692 42  8,000  163,962
43  – 293,427 43  8,000  185,719
44  – 316,901 44  8,000  209,217
45  – 342,253 45  8,000  234,594
46  – 369,634 46  8,000  262,002
47  – 399,204 47  8,000  291,602
48  – 431,141 48  8,000  323,570
49  – 465,632 49  8,000  358,096
50  – 502,882 50  8,000  395,383
51  – 543,113 51  8,000  435,654
52  – 586,562 52  8,000  479,146
53  – 633,487 53  8,000  526,118
54  – 684,166 54  8,000  576,848
55  – 738,899 55  8,000  631,635
56  – 798,011 56  8,000  690,806
57  – 861,852 57  8,000  754,711
58  – 930,800 58  8,000  823,727
59  – 1,005,264 59  8,000  898,266
60  – 1,085,685 60  8,000  978,767
61  – 1,172,540 61  8,000  1,065,708
62  – 1,266,343 62  8,000  1,159,605
63  – 1,367,651 63  8,000  1,261,013
64  – 1,477,063 64  8,000  1,370,534
65  – 1,595,228 65  8,000  1,488,817
66  – 1,722,846 66  –  1,607,923
67  – 1,860,674 67  –  1,736,556
68  – 2,009,528 68  –  1,875,481
69  – 2,170,290 69  –  2,025,519
70  –   2,343,913 70  –   2,187,561

Conclusion: The interesting thing about this is, once the 22 year old has accumulated $100,000 by the time he is 30, he will not have to put away any more money, and let compounding returns take hold. By the time the two brothers are 70 years old, the younger brother will still have more money than the older brother ($2,343,913 VS $2,187,561). This is despite the fact the the older brother will continue to contribute $8,000 until he retires and the younger brother doesn’t.

Lesson learned? Save EARLY, and hopefully try to achieve that $100,000 by the age of 30. Once you have done that, you will not have to save any more money and have 2.2 million in your bank account by the time you are 70.

The tax advantages of a 1031 exchange when selling and buying a home
Setting A Budget, Saving, and Investing

3 thoughts on “The Power of Compounding Returns: Save $100,000 before you are 30 and you are set

  1. Seth

    Wow, interesting article. I should start saving ASAP

    1. Sam Post author

      8% is a return sufficient enough to compound your returns with a $100,000 so that you do not have to contribute any more money to it. Historically the S&P 500 has returned 9.8%, so there you go

Comments are closed.