Download Understanding the Power of Compound Interest

Understanding the Power of
Compound Interest
• A 20 year old student wants to start saving for
retirement. The student plans to save $3 a day.
Every day, she puts the $3 in her drawer. At the
end of the year, she invests the accumulated
savings ($1095) in an online stock account. The
stock account has an expected annual return of
12%.
• If she keeps saving in this manner, how much will
she have accumulated by age 65?
$1,487,261.88 !
N=45, I=12, PMT=1095 PV=0 FV=1487261.88
How much would she have by age 65 if she waits
until age 40 to get started with the same savings
program?
$146,000.59
N=45, I=12, PMT=1095 PV=0 FV=146000.59
So, it pays to get started early!!
What if the 20 year old investor put her money in a
bank account paying 5% -- How much would she
have by age 65?
$174,871.17
CALCULATOR BOXES
This illustrates why many financial
planners recommend stocks for longterm investors. Note, however, that
stock returns are far from guaranteed!