Unless you were lucky enough to be born into a family that has a large amount of money, then chances are you will have to work for money at some point in your life. You will earn a salary or hourly wage and you will use that money to pay your way in the world. But eventually, you will want to stop working and enjoy a retirement age. And if you have been wise and put your money to work for you, then you can often reach that time of relaxation much earlier.
Of course, not every situation is the same. Some people may have specific goals for which they are saving in addition to their basic retirement expenses, such as sending a child to college or buying a second vacation home. You may have a pension from your work, or you may be on your own when it comes to retirement expenses. Taking into consideration the fact that life expectancies are increasing all the time, and you may find yourself needing to plan for a greater period of time than you may think. So having your money start to work for you at an early age will pay out more and for a longer period of time in your future.
How is this so? Well, in part, as we discussed in the 'Get Rich Slowly' article, investing your money allows you to stay ahead of the depreciation of money's value and earn some return on your investment as well. But there is also the fact that interest compounds over time, adding to your earnings without you having to lift a finger. As an example, let's say that you were to invest $1.00 today and the annual interest rate or rate of return of the investment is 8%. That means that in one year, you will have $1.08 in the account. If you leave that money where it is, at the end of the year you will have earned interest on not only your original $1.00, but on the previous year's interest as well, giving you about $1.17. This compounding interest will continue, year after year. But imagine that instead of $1.00, it's $100, $1,000 or even $10,000 that you start with and you can see the value over time.
Of course, this is only one possible way to invest. Most of us don't have $10,000 to invest from day one. Instead, we will be building our savings over time. We may start with $100 a month, added each month over the years. You can still reach a significant savings, but it will simply take more of your own money to get there. This is called an 'accumulation annuity,' and you can use calculation tables available from your investment broker, bank or online to figure out exactly how much money you will need to invest regularly in order to reach your goal. But to give you an idea; if you put $100 a month in a mutual fund that earns 8% for 20 years, you'll end up with $54,960. But what if you invest $100 a month at 8% for 30 years, just 10 years more? You will then have $135,960. And if you continued investing for 40 years, that sum goes to $310,920. This shows you that the longer you invest, the more you allow your money to work for you.
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