The law of compund interest

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A Dollar Saved...(or Invested)
If you save and invest money every month, you will become a millionaire at some point. As Einstein put it, compound interest is the "eighth wonder of the world." It all depends on how much money you currently have, how much interest that money will earn (the tricky part), and how much you can save each month -- and, of course, how long you can wait. Another critical part of the equation is that you leave the interest earned alone so that it keeps earning interest.
There's one often-cited example of the power of compound interest. If Christopher Columbus had placed a single penny in a 6 percent interest-bearing account and instructed someone to remove the interest every year, the value of the interest earned by 2005 would be almost 31 cents. But if he had placed the same penny into the same interest-bearing account but left the earned interest to compound -- earning interest upon the interest -- the resulting balance for 513 years would be $95,919,936,112. That's $95 billion!

All over the Internet, you'll find calculators that tell you how much you need to save each month in order to have a million dollars by an age you specify. For instance, if you're 30 years old, have $5,000 already, save $100 per month, and can earn 8 percent interest, you'll be a millionaire in a mere 51 years -- at the ripe old age of 81. Most calculators will also tell you how much that million will actually be worth by that time because of inflation. In our example case of 51 years, a million dollars will only be worth $213,215 in today's dollars, which probably won't be enough for financial freedom.

The more you save and the better the interest rate, the sooner you'll become a millionaire. However, a million dollars will be worth less in today's dollars.



This means that you have to work to make that million happen in fewer years. Not only will you get to retire sooner, but when you do, your money will have more buying power. Let's go back to our calculator and change the numbers a bit. Let's say that, instead of $100 a month, we save $200. That changes our million-dollar mark to age 73, or only 43 years. It also changes the adjusted worth to $265,069. Now, let's say we find a way to scrape together $500 a month to save. That drops our million-dollar mark to age 63, or only 33 years. Not bad. And, the value at that time will be $361,977. Now, what if instead of 8 percent interest, we invest our funds well and can average 10 percent earnings? Now we'll be millionaires at age 59. Granted, that million will still be worth less than $500,000 in today's dollars ($414,882).

You should also determine how much money you will need. A million dollars sounds like a lot of money and a good amount to shoot for but depending on your lifestyle, it probably won't be enough to retire on when the time comes if that's your goal. Usually, the same Web sites that have those handy millionaire calculators also have retirement calculators. By plugging in your current expenses and an estimate of your expenses once you retire, you can come up with a more realistic financial goal for retirement. You may find that you need to be a multimillionaire in order to retire with the lifestyle you want.

Of course, simply being a millionaire (or multimillionaire) at retirement isn't everyone's goal. Most of us would like to experience the millionaire lifestyle sooner rather than later. We want financial freedom so that our investment interest is enough to pay our living expenses. In that case, let's talk about how you can make that happen.