The Power Of Compounding Interest

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Always using Excel, I have decided to create a little spreadsheet to show the power of compounding interest. For these examples, I am assuming the following information:

* I used simple interest, compounded annually (meaning you earn interest on interest)
* For simplicity, I decided to use 5% as the interest rate
* These investments do not take into effect any tax consequences or limits on annual RRSP purchases
* Let’s suppose my two comparisons are for the same person, different circumstances
* With the power of Excel, I was just plugging the “investment” number needed to break the desired goal amount, and probably doesn’t make much sense – except that’s the way I did it

EXAMPLE ONE – EARNING $100,000

(Q1) If I started at age 20 and invested for 15 years until I was age 34 .. how much will I have to invest to have at least $100,000 at age 65?

(A1) For the first 15 years, it would take $972.57 per year (or $81.05 per month) to reach $100,000 goal. The total contributions would be $14,588.55 over the 15 years.

>> The total combined payments over the 46 years would be $56,312.07

(Q2) If I start again at age 35 and continue to invest the same amount until I reach age 65 .. how much will I have to invest?

(A2) For the remaining 31 years .. I would have to invest $1,345.92 per year (or $112.16 per month) to reach $100,000 goal. The total contributions would be $41,723.52 over the 31 years.

>> If you contributed $1,947.10 per year (or $162.26 per month) instead, for the first 15 years .. you would also reach the $200,000 by age 65 but, only outlay $29,206.50

retirement_contributions-1.jpg

EXAMPLE TWO – EARNING $1,000,000

(Q3) At age 20, if I started investing $25 per week (or $1,300 per year) as a base, and continued to make these payments until age 65 .. will I have $1,000,000? If not, how much extra do I need to contribute?

(A3) The answer is NO. However, if you increase your weekly payment by an additional $6.00 per week (or $312 extra per year over the prior year) you WILL reach $1,000,000 by age 65.

>> The total contributions over the 46 year period would be $382,720

(Q4) I’m not 20 .. I’m 43 years old and have no retirement savings. If I contribute $15,000 for the next 22 years, will I have $1,000,000? If not, how much extra do I need to contribute?

(A4) The answer is NO. However, if you increase your annual payment by an additional $1,000 per year over the prior year, you WILL Reach $1,000,000 by age 65.

>> The total contributions over the 22 year period would be $598,000

retirement_contributions-2.jpg

STUFF FOR THE TAKING

You can see my calculations and play with it on your own computer .. It’s not that sophisticated, but you’re welcome to download it if you wish. In the above scenarios, I’m probably best to fit in scenario two, (Q4) because that’s how old I really am – 43. For my own personal interest, I just plugged in my 2005 Year End market values of my portfolios, and then tweaked the investment column figures until I came to a suitable plan for investing in my own future to reach that $1,000,000. You can try it yourself with your own situation!

NOTE: I prefer to use MICROSOFT EXCEL for WINDOWS 95 Version 7.0 for business reasons (it formats better) and that is the format. This spreadsheet will work in later versions of EXCEL and, if all else fails .. try downloading from http://OpenOffice.org their version of “CALC” .. it will pretty much read all versions of excel and other spreadsheet program data out there.

Stuff for the taking: http://AndYouRetire.com/stuff/andyouretire.com-stuff-001.xls

Just click on the above link. You may press OPEN to view it in your browser (if your browser supports that) or SAVE AS to download to your local drive and open it up with your own spreadsheet program.

Comments

[…] See my previous post: The Power of Compounding Interest. This is all OLD NEWS to me, because I pretty much “knew” the power of compounding interest and investing way back during my University days. It was a good time to start to invest in my retirement early! I had “Book Smarts”! […]

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