Some financial experts suggest that you may need one million dollars to retire comfortably. Of course, this depends on your living expenses, what you consider a comfortable life, and how long retirement will last for you.
For people who come from money, this might not seem like a lofty goal. For those of us working normal jobs (and even living paycheck-to-paycheck), the idea of becoming a millionaire may feel like a far-off dream.
If you're in that second category, you should know about compound interest. Is it possible that it can turn you into a millionaire if you play your cards right? Read on to learn all about it.
What Is Compound Interest?
In basic terms, compound interest is "interest on interest." It's the total of all of the interest value combined with the principal (the original sum of money that goes into a loan or investment) minus the present value of the principal.
Simple interest is only based on the initial amount of money that someone invests. Compound interest adds together all of the money that accumulates because of the building interest.
In other words, you reinvest the small amount of money that you get as interest, and it builds up over time.
Compounding can happen at different intervals. It can be daily, monthly, or even yearly.
The Value of Time in Compounding Interest
The younger you are (and thus the more time you have to accrue interest), the more compound interest can benefit you in the long run as long as you're willing and able to leave your money untouched.
The sooner you start investing for retirement, the better off you'll be.
Let's say you start with $1000, to keep it simple. The interest on that is 5%.
After the first year, that 5% initial interest will turn your $1000 into $1050. You then add that extra $50 back into your investment, so by year 2, you're at $1102.50. By year 3, you're at over $1157.
While this seems like slow growth, that slow growth adds up over time. Of course, you should be planning to add more money to that investment as well.
Compounding isn't a replacement for continuing to add money to your investment account. It's a way to make that money grow more quickly without any extra effort or risk.
It's recommended that people start investing at or before age 25, but it's never too late.
Will Compound Interest Turn You Into a Millionaire?
Whether or not you become a millionaire will depend on how much money you're able to invest. At the end of the day, compound interest will get you closer to becoming a millionaire than simple interest, and if you're able to put aside even $5 per day into an account with an 8% return, you'll have over one million dollars in 50 years.
If you're able to invest more than that, the process will be much quicker.
At Alinea, we want to help all people start investing. Download our app and join our community to start building wealth today for a financially stable future.
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The Content is for informational purposes only, you should not consider any such information or other material as investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsem*nt, or offer by Alinea Invest or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction. When investing your capital is at risk.
Eve Halimi is the Co-Founder and Co-CEO of Alinea, an investing app created for Gen Z’s which allows users to grow their money by investing in what matters to them. She gained extensive experience empowering brands to build better digital experiences working in strategy at Contentsquare, a growth stage data analytics startup, bringing that expertise to Alinea. Prior to creating Alinea, Halimi held multiple positions at financial institutions and hedge funds such as Goldman Sachs and Boussard & Gavaudan. She founded her first community-based application at the age of 15. Alinea is backed by Y Combinator, Harvard, Kima, Goodwater and many other leading investors.
