Your 20s are one of the most crucial decades in your financial life. Believe it or not, this decade may make or break your ability to retire on time, send your hypothetical future …
Your 20s are one of the most crucial decades in your financial life.
Believe it or not, this decade may make or break your ability to retire on time, send your hypothetical future children to college, or have your home paid off before you turn 60.
Here’s why your 20s are so important, and what you can do to steer yourself on the right financial track.
The Power of Compound Interest
To explain why your 20s are so important, let’s talk about a little phenomenon called compound interest. It’s so important, Albert Einstein refers to it as the most powerful force in the universe.
Compound interest refers to money that grows upon itself. It’s investment incomewhich grows upon its own growth.
If that sounds abstract, let’s illustrate it with a hypothetical example.
Let’s imagine you have $100. At age 20, you invest this and earn a 10 percent return. That means the following year, you have $110.
You keep the entire $110 invested and it earns a 10 percent return again. In year two, you’ve earned $121: $10 came from the first year, and $11 came from the second year.
Why $11 in the second year? Because not only did your original $100 earn a 10 percent return, the additional $10 that you earned also earned a 10 percent return of its own — which equals an extra $1. That’s why you have $11 in year two rather than $10.
Your money keeps growing upon itself each year until by year seven, at age 27, your $100 has become $200.** Thanks to compound interest, you’ve doubled your original investment.
This particular example might sound like small potatoes. Who cares about doubling $100 to $200 over the span of seven years? Let’s take another look.
Imagine that you’re not just investing $100. Imagine investing $100 per paycheckcontinually throughout your 20s. Then imagine that it doesn’t stay invested over the span of seven years, but over 40 years instead.
You now have a significant sum of money on your hands. The longer your money is invested, the more compound interest works in your favor. That’s why you want to keep your money invested for as long as possible.
The best way to achieve this is by starting as early as possible. This is why your 20s are an ideal time to start saving and investing, particularly for long-term goals like retirement. Thanks to compound interest, just a little bit saved now can yield huge results down the road.(more…)