I remember the first time I learned about compounding. Compoun-what? My 2006 Oxford English Dictionary says that "compound" means "a thing composed of two or more separate elements." Though not directly applicable at all here, it's kind of true. Money compounds when it grows on itself - when money earns interest, then earns interest on that interest (or interest+principal+growth together = big bucks). In other words, if you invest $100 when you are 20, and earn somewhere between 6-8%, what do you think that equals when you are 70? $150? $200?
Guess again...
$1,840 to $4,690!!
Several caveats I need to talk about here. Is there any investible fund out there that will guarantee 6-8% for 50 years? The safe response is something uppity like "highly unlikely," but I'm just going to tell you - no. There will be some years if you buy a balanced fund of bonds and stocks that you will be up 15% and then down 20%. The 6-8% I refer to above is an average. So don't get too excited to go out and find a sure thing. My point is that saving when you are young, and getting those funds invested is so much better than not saving at all. Pardon while I geek out for a minute, but here's some more math for you:
$100 at 8% return for 50 years = $4,690
$100 at 8% return for 40 years = $2,172
$100 at 8% return for 30 years = $1,006
$100 at 8% return for 20 years = $466
Do you see why the media and most people you know with gray hair are freaking out about retirement in the US? Look at what a difference a few decades can make! I know what it feels like to feel super poor in your twenties, but socking away just a little bit can make a huge difference.
How do you get started? Open a brokerage account with one of the big independent custodians - Charles Schwab, Fidelity, TD Ameritrade, etc. Don't pay too much for trades. A simple google search will show you what's reasonable, but you might want a large balance ($500+) to build up before you trade. Several mutual funds and ETFs waive their trading costs, but beware their ongoing fees.
Investing can seem like a big, scary, unknown world, but don't put it off - good things and large balances come to those who start early, and wait!
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