Compound Interest Is Your Friend

It’s Money Monday!

So I had someone ask why their daughter should start contributing to her retirement plan at age 21.

The answer? Compound interest!

There are all kinds of charts that will show you how investing small amounts consistently over time will give you the returns you need to retire comfortably.   Compound interest is your friend.

I wasn’t able to begin investing for my retirement until 15 years after I graduated from high school in 1980.  I didn’t pass the poverty threshold of $12,490 until I was 10 years beyond my high school graduation. It was another 5 years before I was employed in a group practice and actually began contributing to something other than social security.  A 401K?  What is that?

When we first sat down to begin educating ourselves, it was pretty daunting. They gave us the advise of projecting how much we would need if we wanted to live off 80% of our salary. The advice has drastically changed over the last 20 years but most of the financial gurus that I follow now say you are financially independent if you have 20-25X of your projected annual expenses in your savings/retirement accounts.

So I started late, but now, at age 58, I can quit working if I choose to. We choose to live way below our means so we could pay off over $150K in student loans, save for our three kids college expenses and save money for ourselves. We invested in stocks. We used a budget until we didn’t need to.

So my point? It is never too late to begin this process. By starting in your early 20s, you will have time on your side and you can rely on compound interest to help you reach your goals. Compound interest is your friend.