Compounding

If I could teach all young people one thing about money it would be for them to understand compound interest.  Compound interest is when you add the interest you've earned on an investment back into the principal sum.  Basically think of it as interest on interest.   For whatever reason this is a hard thing for a lot of people to grasp the basic magic of how it works, especially if you don't have business or financial training.  Now you can see how this works for yourself.  Go to this link and play around with the concept yourself.  You can just plug in some variables in the calculator and see how the concept works with real life examples.  It will give you some things to think about especially for those of you just starting out putting money away.  

Say for example you've just started working in the past year or so and you've built up $5,000 savings in your company retirement plan.  You are saving $250 a month and you're not going to retire for you estimate 40 years.  Let's also take a conservative number and assume your assets on average grow 4% a year.  That money, using those assumptions, would grow to over $320,000 by the time you'd be ready to retire.  Not bad for starting with five grand and adding $250 a month.

Anyway go play with the calculator or use it in your own retirement planning.  If nothing else it shows you the magic of compound interest.

Back Friday.