|
THE MIRACLE
OF COMPOUND INTEREST
By:
Nicholas
T. Simonic C.P.A. MACC
Some time ago
I was in South Florida, visiting some of my clients. While I was
there one of my clients asked me to do him a favor. This was to
explain to his 14 year old and 16 year old sons how they could put
some money into investments for a period of time and not have to
worry about having enough money to retire when they are of retirement age.
Well, I
proceeded to do some number crunching on my computer to come up with
a scenario that was comfortable for the boys. His 14 year old son
does odd jobs and gets an allowance. His 16 year old son works part
time in his office. What I came up with was astounding even to me!
The average 14
year old can save $6.00 a week of today's money very easily. This can
be done through part of the allowance going to savings or one or two
day's lunch money going to savings and brown bagging it. I did some
calculations on a scenario where his 14 year old son would put $25
per month into an investment account until he was age 29. The total
amount he will have contributed in those fifteen years is $4,500.00.
However, if he leaves this money in an investment account generating
compound interest, and stops saving the $25 per month when he is 29
years old, this $4,500 will grow to an estimated $3,255,489.73, by
the time he is 64 years old. This is the miracle of compound interest!
The 16 year
old son would be able to put an estimate of $10 per week aside for
investments, considering the fact that he works part time for his
Dad. This $10 per week, which would be put into investments until he
was 31 years old (fifteen years) comes to a total of $7,200 put into
the investment account. When he is 31 years old he stops contributing
to this account and leaves the funds there until he is 62 years old.
At age 62 he will have accumulated $3,232,447.49.
Can you
imagine setting up a retirement fund which grows to millions of
dollars just by putting $7,200 into investments? This is a great way
to establish retirement for your children. By forcing them to get
into the habit of setting these funds aside, they will be part of the
one percent statistics of Americans who retire comfortably. All it
takes is discipline and time.
To illustrate
this point further let's assume the 16 year old did not start saving
$40 per month until he was 31 years old. Let's further assume that he
saves $40 per month for the next 31 years (until he is 62) rather
than the initial 15 years (between age 16 and 31). His total
investment account at age 62 is $325,988.08 instead of over $3
million. This is why it is imperative to instill in your children the
need for savings at early ages. The savings are not nearly as
effective when they are older.
I trust that
this article is enlightening to you. It sure enhanced my awareness of
the miracle of compound interest. See you next time.
Nicholas T.
Simonic C.P.A. MACC
For
information about Making "cent's" out of tax dollars,
contact our Managing Partner at simonic@simonic.net
|
