By Chris Palabe, CFS®, AIF®
Albert Einstein called compound interest the eighth wonder of the world. When it comes to building your savings, compound interest is key.
And if I had only one financial lesson I could teach, it would be to maximize your savings with compound interest—as early as possible, as time is the most powerful investment facet, even more powerful than saving more!
Let’s take a closer look at what compound interest is, and what it can do.
What Is Compound Interest?
Compound interest basically means your money makes money. And the money your money made also makes money over time.
Or, in more fanciful terms, compound interest occurs when interest is earned on both the initial investment and the accumulated interest from prior periods. This amount can multiply at an accelerating rate and create much more money than the original amount invested. Let’s look at an in-depth example.
If you take $1,000 and invest it in an account that earns a compounded rate of return of 10% per year, then after 1 year, your initial investment increases to $1,100. The next year, you earn 10% interest on $1,100, increasing the amount to $1,210. Such that over 30 years, your initial $1,000 turns into $17,500. In fact, at 10% annual returns, your investments can be expected to double in 7 years. Think about that for a 55-year-old planning for retirement. They may have $2,000,000 saved up now, but at age 62, when they’re ready for retirement, they’ll have $4,000,000. And that’s without adding any more savings!
Thanks to compound interest and its wonderful effects, someone who was a good saver early in their career can sit back and let their investments do all the work. Compound interest has taken over and will grow retirement funds for you. But how do you know if you’re saving enough for retirement?
How Much Do I Need to Save?
The answer: it depends. How much income will you need each year in retirement?
If you plan to retire in your mid-60s, your retirement savings may need to carry you through 30-plus years. Not to mention rising inflation that will decrease the value of your savings over time and the additional expenses you will likely encounter along the way.
A sound strategy to avoid running out of money in retirement is to work with a financial professional to understand what your savings can handle. Contrary to popular belief, you cannot use a multiple of your annual income to determine how much to save. This is why it’s so crucial to plan ahead. The sooner you understand your need, the more options you will have and the easier your goals will be to accomplish.
We’re Here to Help
Don’t feel discouraged if you didn’t begin saving as early as you wish you had. It’s never too late to get started preparing for your ideal future. Remember that you don’t have to walk this journey alone. As independent financial advisors in Gurnee, Illinois, and Wellington, Florida, we specialize in helping people like you with retirement planning, wealth management, and financial planning. It’s our goal to help you create a plan for a financial future you can have confidence in. If you need help with retirement planning and financial planning, schedule a 15-minute introductory phone call or call us at 847-249-6600 to learn if we are the right fit for your financial goals.
Chris Palabe is the founder and CEO of Palabe Wealth, a financial services firm providing retirement plan strategies for businesses and individuals. For 25 years, Chris has been serving his clients with customized plans and a boutique approach. He started his firm because of his passion for making a difference in others’ lives and a genuine desire to build long-term relationships with his clients so they can seek to achieve their ideal retirement and manage risk. Chris is a Certified Fund Specialist® (CFS®) and Accredited Investment Fiduciary® (AIF®) professional and has a degree from Université Denis Diderot (Paris VII). When he’s not working, you can usually find him riding horses and competing in dressage at a national level. He also loves reading, watching movies, and eating out. To learn more about Chris, connect with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This material was prepared for Palabe Wealth Inc.’s use.