Savings HACK: Compound Interest

It’s Hump Day, Friends! 

Let’s talk about ✨magic.✨

Not the kind where Neal Patrick Harris pulls a rabbit out of a hat, or the quarter that street performers miraculously pull out of your ear.

Today, we’re talking about the magic of compound interest and how it can help you reach your retirement goals!

First, we’re going to break it down.

💲 Compound vs. Simple Interest 💲

Simple interest. Earn $$$ based on the principal amount in your investment or savings account alone. 

Compound interest. Earn $$$ based on the principal and the interest the principal generates. Compounding interest utilizes past gains to grow your money at a faster rate.

🏦 Roth IRA vs. Compound Interest 🏦

A Roth IRA (individual retirement account) is an account funded with post-tax dollars, and therefore grows tax free.

The maximum amount that you can contribute to a Roth IRA in 2024 is $7,000. From there, your money grows through compounded interest!

I found a great example on the power of starting early that I’d like to share: 

An investor contributes $6,000 to her Roth IRA starting at age 25. With an average of a 7% interest rate, she’ll have earned 1.48 million when she retires at age 67. 

The same investor contributes $6,000 to her Roth IRA starting at age 30. With an average of a 7% interest rate, she’ll have earned 1.03 million when she retires at age 67. That’s $450,000 less than the first example.

In both examples, the investor earned compound interest on her hard-earned $$$ that led to a significant amount saved for retirement. 

Roth IRA accounts feature low barriers to entry, low startup fees, and diverse methods of investing that make the Roth an accessible account to most.

We recommend utilizing Fidelity or Vanguard to open and begin investing in a Roth IRA as soon as possible!

You can get the benefits of compounding interest with huge monetary returns in retirement. You just need to start NOW!

Time in the Market vs. Timing the Market ⏳

Studies have proven that a smaller amount contributed earlier will yield greater returns than a larger $$$ amount contributed later because of compound interest.

For those of us who aren’t flushed with cash, this is great news! We can begin investing early (a.k.a. RIGHT NOW!) and see amazing growth on our money because time IN the market is better than timing the market.

We’re playing the long game, friends!

So whether you have $20 or $2000 to invest, beginning is the most important step.

You can do this!

Sincerely,
Kim

⭐️⭐️ P.S. Want to share all this goodness with your friends AND earn cool Frugal Friends merch?

**Means this is a sponsored or affiliate section. We may earn a small fee or commission when you choose to try one of our sponsor or affiliate partners. But opinions are still 1000% our own.

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