Compound interest

How to become a millionaire with compound interest

As you get older, you might take a hard look at your financial history.

If you want to become a millionaire by the time you reach middle age, now is the time to get your personal finances and credit card debt in order.

The more you start investing now and the more money you keep in your investment accounts, the faster you can reach your financial goals.

While you might not feel like you are making enough money to put aside in an investment account, now is the time to start. Try to cut back a few expenses each month, because every little amount you can save and invest now makes a difference, thanks to compound interest.

How Compound Interest Works

Suppose you have to put $ 1,000 into an account that has an interest rate of 9% and compounds (adds interest to principal) once a year.

During the first year, the interest rate will be represented as a percentage of the starting balance. Each year, the interest is calculated by adding the starting balance as well as the interest.

This is how it works:

  • Starting balance: $ 1,000

  • Year 1: 9% interest on $ 1,000 = 1,000 X 1.09 = $ 1,090

  • Year 2: 9% interest on $ 1,090 = 1,090 X 1.09 = $ 1,144.50

  • Year 3: 9% interest on $ 1,144.50 = 1,144.50 X 1.09 = $ 1,247.51

Composition periods

As you might have guessed, when you have more funding periods during the year, the more money you can make each time. If you have an interest rate of 3% compounded semi-annually, you will earn more than if it were an interest rate of 6% compounded annually.

For example:

  • Starting balance: $ 1,000

  • 3% interest compounded semi-annually

  • First compounding: 3% interest on $ 1,000 = 1,000 X 1.03 = $ 1,030

  • Second compounding period: 3% interest on $ 1,030 = 1,030 X 1.03 = $ 1,060.90

  • 6% interest compounded annually

  • 6% compounded annually: 6% interest on $ 1,000 = 1,000 X 1.06 = $ 1,060.

While you might think more numbers sound better, an extra dialing period will make a difference. The more you have invested, and for long periods of time, the more obvious it becomes.

Start now

A TD Ameritrade study found that the average Millennial don’t plan to start saving for retirement until their late 30s, and half don’t invest in the stock market.

Michael Taylor, former bond salesman at Goldman Sachs (NYSE: GS), is now working to help people understand how important it is to start earlier.

“We have the misconception that it is impossible to get rich,” Taylor said. “The barrier to being a guaranteed millionaire is relatively low, provided you start early. “

Even if you start to save a few dollars a day, it will add up quickly. If you save $ 5 a day in an account that has an annual return of 10%, it will become $ 2.3 million in 50 years.

Starting now and starting small is the secret to becoming a millionaire before you retire.

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