People always say to put money in the stock market. It will grow! But how much will it grow? Is it truly worth it?
If we assume that you will retire and access the fund at 65 years old and that you achieve a modest return on your investment of 8%, You could make 32x every dollar you put into the market as a 20 year old. However, this drops off very steeply when you get to the age of 40. At 40 years old you are only getting about 6.8x what you put in the market. But Why?
Compounding interest is a crazy tool. Its the reason your money is able to grow so much over a long period of time. But the key to compounding interest is time. The rate of return helps but if you don't have enough time, then your money cannot grow exponentially.
The compounding interest formula is:
Final amount = Starting amount*(1+rate of return)^time
From this formula we can see that what allows our money to grow exponentially is time. This is why time in the market is so much better than timing the market. Below is a chart on how much 1 dollar will turn into by the age of 65 if you just leave it in the market and it achieves a modest average return of 8% per year. Note that an average of 8% return is a conservative estimate. Realistically, you can probably average a higher average return per year. Below you can see the table of compounding returns.
|Age||Money By 65|
Want to see how far your money can take you? Try the Compounding Interest calculator below and learn how much your money can grow over time.
Compounding Interest Calculator