Compounding Makes A Difference

     A couple of postings ago I suggested that you start to save $20 or even $40 out of every paycheck. I also suggested that you do this for a year with out touching the money set aside. What might not seem like a lot does add up. It adds up to financial freedom. Now I want to visit the idea of compounding interest.

Table 1

     As I have demonstrated in some examples in the past, compounding interest does not make you instantly rich. In fact, it will be quite some time before it will do anything of significance to your financial stability. What I am looking for here is to squeeze every penny possible out of making your money work for you.

 
    If you refer to Table 1 you can see that your first end of the month interest payment for January is only $.10. Even after your first year the payout at the end of December is not significant at $1.32 per month. This gives you a meager $8.22 for the entire year, nothing that one can live on or even get rich off of.

Table 2

     After 10 years it is starting to look a little better. In December of your 10th year you can expect to be receiving $15.14 in interest per month. That of course is not much but remember it is $15.14 per month that you did not have to work for. It is because the money you saved is now working for you to earn you money. That comes to an extra $869.74 that you would of never had and that you never had to sell your time to earn it. Just imaging what you could do if you saved $40, $60, $80, $100, $500 or even $1000 per paycheck. Just imaging where you could be.
    The nice thing is that I have already calculated these numbers out and they are rather impressive.  Just see the listing below to realize the power of compounding in just a 10 year span of time.

$40 Investment per paycheck = $30.27 per month interest = $1,739.49 total interest earned.

$60 Investment per paycheck = $45.41 per month interest = $2,609.23 total interest earned.

$80 Investment per paycheck = $60.55 per month interest = $3,478.98 total interest earned.

$100 Investment per paycheck = $75.68 per month interest = $4,348.72 total interest earned.

$500 Investment per paycheck = $378.41 per month interest = $21,743.62 total interest earned.

$1000 Investment per paycheck = $756.83 per month interest = $43,487.24 total interest earned.

     Now just imagine what you can do with your money if you started saving when you are 18 or 20 years old and saved like this until you wanted to retire. How much would you have. Now I am going to burst the bubble just a little bit, but I have to before any of the financial geeks out there try ripping me apart for not taking into consideration one major issue with these calculations. I never took into consideration taxes. Yes, we do have to pay annual taxes on what we earn. That cuts into the interest that can compound and will significantly decrease the ending totals that I have come up with. I chose to do these calculation with out the consideration for taxes because there are ways to save and compound the interest with minimal taxation or even no taxes.You will have to eventually have to pay taxes it just is a matter of when you pay the taxes, before or after you have compounded your money + interest.

Everything that I write are the results of my own research. I strive to provide the most accurate information possible and cannot be responsible for any errors. I am not an accountant or a fiduciary. Before investing or using any of my ideas it is advisable to consult a financial professional. I am not responsible for any financial loss that might occur through the use of my ideas. Do your own research and come up with your own answers. The examples that I provide are just that, examples and are meant only for the purpose of teaching cash flow and ideas for possible investments.