When Compound Interest Matters
Once your savings grow large enough, compound interest can become a significant source of income. This is why the wealthy often live off the interest on their investments rather than their wages.
We all saw exponential growth during the COVID-19 pandemic, where numbers seemed insignificant until they suddenly skyrocketed. The same principle applies to compound interest—it may seem slow at first but can explode in value over time.
For long-term goals, compound interest can either bring your goals closer or increase your wealth significantly. For instance, saving $1,000 a month to reach $100,000 will take about 9 years without interest, but only 7.5 years at a 5% interest rate. This time saving is underwhelming, showing how compound interest really needs decades to make a big impact.
If your goal is to maximize your wealth in 30 years, compound interest will substantially increase your final savings. Saving $500 a month for 30 years without interest yields $180,000, but with a 5% interest rate, you end up with $398,000—more than twice as much.
