Most of us have some sort of retirement investment set up for the distant future when we might like to walk barefoot on the warm beaches down south. But for many of us, this distant future is 20, 30, or maybe more than 40 years away. Investing in our retirement sounds smart, but is it really effective? To answer that question, we need to understand the compound rate of growth as it pertains to our investments.
For starters, we all know what compounding means. In its most basic terms, it basically means, “to build on itself”. Many like to use the analogy of a snowball rolling down a hill. At first, the snowball rolls slowly and really doesn’t get that big, but as it continues to roll down the hill, it gets bigger and bigger at an alarming rate! The same is true for a consistently growing investment. It starts out small and grows very slowly, but then as you continually add money to this investment, and as the interest accumulates, your investment begins to grow at an alarming rate!
Maybe the snowball visual didn’t do it for you. To be honest, I’m not sure I’ve ever really seen a snowball roll down a hill and turn into a colossal, giant snow boulder at the bottom (other than in cartoons). So how about a graph? If we added a consistent amount of money each month to our investments and those investments continually grew, this is what our money would do!
The above image is a great visual for the effects that the compound rate of growth would have on your finances. So, what’s a good rate? Many investment professionals would tell you that the stock market as a whole has increased by 12% on average over the last hundred years, so is that a good rate to go by? I say, absolutely not. First of all, the market has fluctuations up and down and even if the market went down 11% in the first year and up 13% the next year, that does not mean that you earned 12% on average. Without getting too deeply into the mathematics, we’ll just say that an excellent rate of return is 8%. By investing a couple hundred bucks a month early in life, you could easily earn yourself over a million dollars when you retire. And it’s all due to that 8% compound rate of growth.
How to Invest?
The most traditional form of investing is with mutual funds. Other methods might be index funds, stocks, bonds, heck, trading currency is even a viable option. With these investments, you could hit that 8% compound rate of growth that you’ve been looking for.
With the help of the internet today, you could even keep your overall expenses low by investing through an online brokerage. The only fees you incur will be when you make a trade. The most important step is actually taking one. Get out there an invest! It won’t make you a millionaire tomorrow, but it most likely will in 30+ years.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.