The Power of Compount Interest Effect
In the illustrations below, assume you make a monthly contribution of $1,500 at age 20 with an annual return rate of 5%, after 20 years, the sum of capital invested is $360,000 and the accumulated capital and investment returns will be about $620,000 at age 40. It will grow to $2,290,000 after 40 years at age 60 with $720,000 invested. The second 20-year tranche will triple the accumulated totals. Increasing the monthly contributions will also increase the accumulated totals proportionally. If the monthly contribution increases to $5,000, the accumulated totals will become $2,060,000 and $7,630,000 at age 40 and age 60 respectively.
The effect of compound interest is not apparent in the short-term and it will become more evident as the snowball grows bigger. It also illustrates that starting early and staying invested with discipline will help get the maximum impact.
On the other hand, the examples also illustrate the impact of high investment costs. An additional fees of 1-2% annually will greatly reduce and transfer your wealth and it is definitely something to look out for.
Last update: 15th February 2022
