Image at right: A poster illustrating the power of compound interest. Click image to go to "Print a Poster". lower left: Exponential Graph from Creating Lifetime Wealth.com
Kids also benefit tremendously from “compound growth”. During the last 80 years, the stock market has doubled every seven years for an average of 8% growth per year. If those averages continue into the future, a kid's investment will double EIGHT times between age 9 and 65 – seven times between age 16 and 65. A couple years ago, Jeff Schnepper gave the following example on MSN Money: if a kid invests $4000 each year in a Roth IRA between the ages of 7 and 18 (and nothing more thereafter), by age 65 that investment would be worth 2.4 million dollars. The compounding that takes place during the last seven-year period adds $1.2 million of that amount. In other words, if the kid had started those investments seven years later, they would have $1.2 million less at retirement age.
The above example of a kid investing $4000 per year may not be realistic, but the following one is much more achievable.
If you open a Roth IRA with an initial deposit of $600, and then add $50 per month, with annual interest of 10% (compounding monthly), at the end of 50 years you will have a balance of $953,441 -- $922, 841 of which comes from compound interest. Consider that your total investment – spread over 50 years -- is just $30,600 – the price of a new car today and the cost of buying that new car will be spread over a much shorter time frame.
This is an optimum and hypothetical example of compound interest (and actual experience will be different). However, this is a powerful illustration of compound interest and the importance of starting an investment program early. If, in the above example, the investment period is shortened just 1 year -- to 49 years, the account would total only $862,498 -- $90,943 less. On the other hand, if you extend the investment period to 60 years (not unrealistic for a kid between the ages of 9 to 12), your total is $2,591,247.93 – and your actual investment is $36,600, spread over 60 years.
This is the power of compound interest. Think what your total could be if you added more than $50 per month!!!! And remember, if this investment and growth is in your Roth IRA, all that compound interest is tax free.
Compound Interest Calculators :