One of the smartest financial moves for people in their 20s is to begin saving for an event 40 or more years later — retirement.
The reason? Young savers get the benefit of decades of compound interest, says Kathy Henningsen, founder of KSH Advisors, a financial planning firm in Bellevue.
Compound interest on your nest egg is more than just interest on the money you deposit. It’s also interest on the accumulated interest to date. As a result, your nest egg grows faster.
By way of example, a twenty-something could seed an investment account with $1,000 and deposit $500 a month. Assume a conservative interest rate of 3%.
At the 10-year mark, the account balance would be about $71,120, even though our hypothetical saver invested $61,000. The bonus $10,120 came from compound interest.
The gains from compounding grow over time. At 20 years the account balance would be about $163,000. In 30 years it would hit $287,800.
And at 40 years that balance would reach $455,600, even though our saver invested $241,000. The difference? Compound interest.
You can try out the numbers yourself with an online compound interest calculator posted by the Securities and Exchange Commission at https://www.investor.gov. Click on “Financial Tools and Calculators.”