Have you ever hit the enter button when using the calculator on your computer, so that the multiplication gets executed over and over, reaching huge numbers? Well, that is compound interest. If I have $100 at 5%, after one year, I will have $105. I can withdraw $5 every year, and after 50 years still have $100 in the bank. Or I could leave those $105, and after 50 years, have over $1100 in the bank.
Sure it’s hard to see the number grow and not touch it, but what would you do with $5 anyway? Now $1100 is a nice sum, one that is worth waiting for isn’t it?
Calculators abound online that allow you to see how much savings will produce the magic number that will allow you to retire early.
Some even include your monthly contribution.
I could go on with calculations, but they will be different for each and every one of us. The important thing, is to LEAVE THE MONEY there and just be patient. Yes, you will have emergencies along the way, life will bring more needs, babies, maybe sickness and other unplanned for events. Try to find cheap ways to solve your problems, be satisfied with the house or the car you have for a bit longer, and let those dollars make baby dollars and the babies after them.
There is no secret, the more you have in the bank, the more interest. If you start small, but start early, for example with $50 a month from age 20 to age 50. $50 is easy to find, even in college, if you slow on the party and the alcohol, and brown bag your lunch. After 30 years you will have $29,136.84 at 3% interest. If you start 5 years later, you will only have $22,300.00. That is a big difference, even more so that we are only talking about $50 a month for 5 years, or $3000, that will give you a difference in you lump sum of almost $7000.
The higher the interest, the higher the lump sum. Those same $50 a month, invested at the average return rate of 8% for 30 years would give you $74,517.97 !! As you grow older, the number grows bigger, to eventually reach the magic number where it can cover your living expenses, and you are financially independent.