Compound Interest – The Secret to Reaching $1,000,000

Building wealth is surprisingly more simple than we make it out to be. The first step is to understand how powerful compound interest is to wealth building and more specifically investing.

Compound interest accelerates wealth building in the short-term and supercharges it in the long-term. Your money earns interest and your interest earns interest, hence the compounding affect.

It’s been said that Albert Einstein called compound interest the 8th wonder of the world and that … “He who understands it, earns it, he who doesn’t, pays it”.

You see, compound interest can work in your favor or against you through debt. This is why eliminating debt is a key principle to building wealth through compound returns. Those would be debt payments can now be investments, which earn interest that compounds.

Let’s look at a couple real-world examples of how simple the numbers really are.

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Compound Returns: $5000/Year Investment in the S&P 500

Let’s say you invest $5000 every year, into an S&P 500 index fund like VOO, IVV or SWPPX, which has produced roughly 10% annualized returns for decades.

Here’s what the compound returns look like over time…

Investment: $5,000/year Investment In S&P 500 Index Fund
Assumed Return: 10% Annualized

In the 1st year you’d earn $500 interest/yr.

In the 3rd year, $1655 interest/yr.

In the 5th year, $3053 interest/yr.

In the 10th year, $7969 interest/yr.

In the 20th year, $28,637/yr.

At this point your principal investment is just $100,000 ($5000 x 20 years) however your account balance has ballooned to $540,909 thanks to compounding interest.

In the 31st year you’ll have over $1,000,000.

“Most great fortunes are built slowly. They are based on the principle of compound interest” – Brian Tracy

Compound Returns: One-time $10,000 S&P 500 Investment

Alternatively, instead of making a $5000 investment each year here’s what a one-time investment of $10,000 looks like.

Investment: $10,000 Investment In S&P 500 Index Fund
Assumed Return: 10% Annualized

$67,275 in 20 years…

$174,494 in 30 years….

and $452,593 in 40 years.

That’s nearly a half-million dollars from a $10,000 investment.

How to take advantage of compound interest

  1. Start investing early – The earlier you start investing the sooner your investment will snowball.
  2. Continue investing – The more frequently you invest the more interest you will earn. Invest what you can, when you can.
  3. Hold – Hold on to you investment and allow the interest to earn interest.
  4. Make wise investments – Interest rates matter and obviously the higher he rate the better your return. A 10% return over 40 years will build considerable wealth.

Compound Interest Calculator – Calculate how much your money can grow with compound interest. Investor.gov Compound Interest Calculator.

Bottom Line

Compound interest is powerful and time is one of its most powerful variables so get started investing now, yesterday would have been even better. Think about the big picture and how a little of bit planning today can have a huge impact down the road. Don’t procrastinate and look back in regret on all the lost years of not investing. Get out of debt, save and invest now. You’ll be thankful you did 30 years from now.

Compound Returns on $5000 Per Year Investment

YearContribution
of $5000/year
Growth
10%
Ending
Balance
1$5,000$500$5,500
2$5,000$1,050$11,550
3$5,000$1,655$18,205
4$5,000$2,321$25,526
5$5,000$3,053$33,578
6$5,000$3,858$42,436
7$5,000$4,744$52,179
8$5,000$5,718$62,897
9$5,000$6,790$74,687
10$5,000$7,969$87,656
11$5,000$9,266$101,921
12$5,000$10,692$117,614
13$5,000$12,261$134,875
14$5,000$13,987$153,862
15$5,000$15,886$174,749
16$5,000$17,975$197,724
17$5,000$20,272$222,996
18$5,000$22,800$250,795
19$5,000$25,580$281,375
20$5,000$28,637$315,012
21$5,000$32,001$352,014
22$5,000$35,701$392,715
23$5,000$39,772$437,487
24$5,000$44,249$486,735
25$5,000$49,174$540,909
26$5,000$54,591$600,500
27$5,000$60,550$666,050
28$5,000$67,105$738,155
29$5,000$74,315$817,470
30$5,000$82,247$904,717
31$5,000$90,972$1,000,689