Saving Money Pays Off Big

In case you haven't heard, compound interest is the best! In essence, you receive 'free money' through interest on your initial investment AND on the interest added to your initial investment.

"Compound interest is the eighth wonder of the world. He who understands it earns it… He who doesn't pays it…"

-         Albert Einstein

Time is a massive factor that can maximize the benefits of compound interest, according to Damen MacGillivray (Sunrise CU Wealth Management).

"The power of compound interest over many years builds wealth extremely quickly. You don't see it as prominent in the first few years, but when you look at the power of compound interest in the long-term, it really builds."," says MacGillivray, "Getting into the habit of putting money away and not depending on that money. The sooner you can do that, the easier it is to build that wealth."

A 25-year who made a $1,000 initial deposit and contributed $1,200 annually and earned a 5% annual return on interest would end up with $112,900 by the time they were 60. A 35-year old who made an initial deposit of $1,000 and contributed $1,200 annual and earned a 5% yearly return on interest would end up with $59,659.

Though the 35-year old contributed just $12,000 less of their own money, they received over $41,000 less interest throughout their investment.

Taking advantage of the power of compound interest can be traced back to a couple of previous articles:

It All Starts with the Budget  and Pay Yourself First 

Getting into the habit of putting money away as part of your budget is vital to taking advantage of compound interest.

As explained in the video below, and in the adjacent table, even small, more frequent deposits are better than more significant annual deposits.

"You're not going to see your account go from $1,000 to $10,000 overnight, but it's getting into the habit of putting that money away and not looking at it and, over the long haul, that's where it's going to build," says MacGillivray, "If it's smaller increments, every two weeks, you don't notice it as much. With automatic withdrawals, it's not like you need to go and do it – that $20, $50, $100 or whatever that dollar amount is automatically going to go and, soon enough, you'll not rely on that money in your daily life."

MacGillivray also recommends looking for low fees, as fund managers take a percentage of the money invested for their services. He says that something that isn't necessarily important to people who are just starting to invest.

"Low fees, that's the most important thing. You want to keep as much of your money working for you as possible – you don't need to be spending it on fund managers. You should be investing for the long haul, you shouldn't really worry about the daily market valuation is of that fund and you should be putting it into something that's going to return you over the long haul."

Another important, leave your money alone – withdrawing interest as you earn it will minimize the compounding effect.