The power of compound interest
Money you save in a savings, retirement, or other account can earn interest or investment earnings. When you leave the money there, over time you can also earn interest on your interest, or earnings on your earnings. Although this sounds like a slow process, once you get started it can result in some impressive growth in the money you’ve saved or invested over the long haul. Compounding interest means that even if you start with $1,000 but never deposit anything else, and earn interest each year, your money will multiply over time.
Learn more at investor.gov
A 20 year old who saves $1,000 a year for 11 years in a row, then stops but leaves it there to earn 7% interest, will have $168,514 at age 65.
However, a 30 year old who starts saving $1,000 a year for 35 years, also earning 7% will have only $147,913 at age 65. Even though the 30 year old has put in more money for more years, it has less time to earn that compound interest.
Here are some additional examples of how $1,000 is compounded over time, and at different interest rates. Clearly, more time and higher interest rates both help your money grow.