Today’s Wonder of the Day was inspired by andrew. andrew Wonders, “How do i make a million dollars?” Thanks for WONDERing with us, andrew!
Do you ever make a wish list a few weeks before your birthday, so that others will know what kinds of things you're wishing for? If you do, you've probably noticed that there are usually things left on your wish list that you don't receive. But that's OK. You can't have everything, right?
Well, maybe you could…if you were a millionaire! If you had a million dollars, you could probably afford to buy all the things on your wish list…and more! Unfortunately, not many of us are millionaires.
Would you like to be a millionaire one day? When you work hard as an adult for your whole life and retirement rolls around, what will you do? Wouldn't it be nice to retire with a million dollars or more in the bank? You could take it easy and have everything you want! Guess what? You can become a millionaire.
If you're a math whiz, you may be thinking right now that it's going to take you a long, long time to save up a million dollars. But there's a secret that comes into play when you save money, especially if you start early. It's called compound interest, and it's all about making money on the money you set aside in savings.
When you save money by putting it into a bank, that money earns interest, which is an amount that the bank pays you to be able to use your money while it's on deposit. If you deposit $1000 and it earns 10% interest, you'll have $1,100 at the end of the year (that's your original $1,000 plus $100, which is 10% of $1,000).
The magic of compound interest is that, when you leave your savings alone, you'll earn interest on your original principal and the interest you earned previously. In our example, the next year you'll earn 10% on $1,100, which equals $110. You add that to your total and it keeps growing more and more year after year.
If you save your money by investing it in stocks or mutual funds, you have the chance to earn even greater returns that can be compounded year after year. The key, however, is to start early. When you graduate from high school, it may seem like you have your whole life ahead of you to save, so what's the big hurry? Can't you just wait a while?
Of course, you can always wait to start saving, but you're losing out on the power of compound interest. And that can be a big loss. In fact, it can be a huge loss. To see why it's so important to start saving early, consider the story of two friends: Earl and Larry.
Earl knew all about compound interest and decided to start early. The year after he graduated from high school, Earl invested $2,000 each year for eight years. After the eighth year, he had saved a total of $16,000 in an investment fund that averaged a yearly return of 12%.
Larry, on the other hand, was a procrastinator. The year after Earl stopped investing, Larry began saving $2,000 every year in the same investment fund that Earl had invested in. Unlike Earl, Larry kept investing $2,000 every year until he was 65 years old. That's a total of $78,000 over 39 years.
When Larry turned 65, he called Earl so they could compare retirement portfolios. Who do you think had the better nest egg? Would it be Earl who saved $16,000 early in his life or Larry who saved $78,000 after a late start?
If you guessed Earl, you're right! Thanks to the power of compound interest, Earl's $16,000 in savings made early in life grew to be almost $2.3 million by the time he was 65. Larry's $78,000 had less time to take advantage of compound interest, but still grew to be $1.5 million by age 65. Even though they both ended up millionaires, Earl earned over $700,000 more while saving $62,000 less simply because he got started early!