The other day I wrote about some of the benefits of the 401k.
Today I’ll go over what really makes investing important and
worthwhile: compound interest. Interest is a fairly simple idea,
and most people understand it on the surface. If I invest $2,000
dollars for a year earning 1% interest I’ll have $2,020 at the
end of that year. This includes my initial $2,000 plus $20 in
interest. Now here is where compounding starts to work. If I
take the $2,020 and invest it for another year how much will I
have at the end of year 2? If you guessed $2,040 you’re close.
I’ll actually have $2,040.20. I know what you’re thinking.
Woohoo, a whole twenty cents more. Granted, it isn’t a lot, but
you didn’t have to do any additional work for that $0.20. It
represents interest earned on your interest. What’s the big
deal? Compounding may look insignificant at first, but over a
period of years it really adds up. Going back to our previous
post a person that invests $5,000 a year from age 30 to age 60
earning 7% (a reasonable ass