Compound interest

How compound interest can help reach a $2 million goal

Saving for retirement is one of the biggest financial goals you can aim for, and it’s not always easy to achieve. The average worker expects to need about $1.9 million to retire comfortably, a Charles Schwab survey found this week. For Millennials and Generation X, the number is $2 million, while baby boomers need about $1.6 million..

Accumulating that much money might seem impossible, but it might not be as hard as you think. The key is to start saving as early as possible and then leave compound interest do the rest of the work for you.

How Compound Interest Can Boost Your Savings

Compound interest—meaning when you earn interest on your interest—is an incredibly powerful tool when saving for retirement. This allows your savings to snowball over time, so the longer you let your money sit in your retirement fund, the faster it will grow.

To get an idea of ​​just how powerful compound interest really is, let’s look at a hypothetical example. Suppose you have a goal of saving $1 million by age 65 and earn a 7% annual rate of return on your investments. Here’s how much you need to save each month to reach this goal, based on the age you started saving:

Age when you started saving Amount saved per month Total savings at age 65



$1.029 million



$1.018 million



$1.020 million



$1.020 million



$1.006 million



$1.033 million



$1.010 million



$1.011 million



$1.035 million

Source: author’s calculations

With compound interest, the sooner you start saving, the easier it is to build a healthy nest egg. But delay saving too long and it becomes exponentially more difficult to create a pension fund.

Saving for retirement when money is tight

As important as it is to start saving for retirement as early as possible, if you’re short on cash, you could focus on more immediate financial needs. However, keep in mind that the longer you wait to start saving, the harder it will be to catch up. So even if you can only scrape together a few dollars a week for retirement, it’s better than nothing.

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To find more money to save, start by planning your expenses. If you don’t already, start track all your expenses so you know where every dollar goes each month. Next, separate your expenses into different categories. The more specific you can be here, the better. For example, rather than lumping all of your food-related expenses into one category, divide them into “groceries,” “takeout,” and “special occasion dinners.”

Once you have your categories, start narrowing wherever you can. The first expenses to eliminate should be unnecessary ones, such as a gym membership you no longer use or subscription services you forgot to pay for each month.

Next, cut back on pleasurable expenses, such as dining out or hobbies. You don’t have to completely eliminate these costs. In fact, you probably shouldn’t. Keeping a few coupons on hand will make it easier for you to stick to your budget. Budgeting, in a way, is similar to dieting: if you completely eliminate all your favorite things, you’ll probably soon fall back into your old habits. But if you make healthy lifestyle changes while allowing yourself to splurge once in a while, you’re more likely to stick with those changes long-term.

What if that’s still not enough?

Sometimes you can do everything to cut costs, but you still can’t save much. If so, try not to get discouraged. Remember that it is better to save anything than to give up because you think your savings will be for naught.

With compound interest, time is your most valuable resource. Even if you can’t save a lot right now, keep saving anyway. Given enough time, these savings can be more than you think.

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