20
Becoming Money $mart
Results are amazing when you keep adding to your original investment
amount on a regular basis. The younger you are when you start, the more your
money grows during your working years. Money earned from compounding
of interest over a period of 30 years really adds up. That’s why it’s called the
magic of compounding!
To get an estimate of how much a one-time deposit of $1,000 can grow for
you, use the following table and write your age in the blanks. This, of course,
does not take into account any additions to your principal. Think what you
could do with just $1,000 added each year!
Year Age 5% Interest 11% Interest
Current Age $1,000 $1,000
Current Age + 10 yrs. $1,629 $2,839
Current Age + 20 yrs. $2,653 $8,062
Current Age + 30 yrs. $4,322 $22,892
Current Age + 40 yrs. $7,040 $65,001
Current Age + 50 yrs. $11,467 $184,565
The idea is to let your money grow without using it for a period of 20
to 30 years. You do need accounts that allow you to use your money for
emergencies. However, you also need long-term savings that build for your
fi nancial independence and retirement. If you choose to keep working after
you reach retirement age, that’s fi ne. You may also choose to work part-time in
your retirement years. Ideally though, continuing to work should be a choice
and not a necessity.
Example 1-3
An example of compound interest is shown in the table below. For each year,
the beginning balance is multiplied by the interest rate of 5%. That amount is
added to the beginning balance. The ending balance then becomes the beginning
balance for the next year.
Year Beginning Balance 5% Interest Ending Balance
1 $1,000.00 $50.00 $1,050.00
2 1,050.00 52.50 1,102.50
3 1,102.50 55.13 1,157.63
4 1,157.63 57.88 1,215.51
5 1,215.51 60.78 1,276.29
How much interest was earned?
Ending balance $1,276.29
Beginning balance – 1,000.00
Interest earned $276.29
Without compounding, interest would be $50 per year, for a total of $250.
Interest that does not compound is called simple interest.