Because of the way compound interest – well, compound on itself – time is the most critical element. With enough time, you don’t have to contribute a lot of money to build real wealth.
Let’s take these concepts and look at how much money you would get from compound interest based on your weekly contributions, interest rate, and term.
Keep in mind that if you’re investing there are costs to consider, such as annual fees and taxes. They are only illustrations to help you understand the relationship between time, interest, regular contributions and wealth.
5% interest rate
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Historically, you can invest in a low-risk, very conservative portfolio and earn an average annual return of 5% over decades.
Even with a conservative investment approach, by contributing $500 a week, you will reach $1 million in less than 22 years.
7.5% interest rate
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Historically, the S&P 500 has averaged an annual inflation-adjusted return of around 8%.
At this rate, by contributing just $100 a week, you would become a millionaire in less than 38 years.
10% interest rate
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It is not easy to achieve a 10% annual return for a long period of time. In fact, it probably requires beating the stock market. This is not necessarily a desirable goal due to the risks involved.
With the right approach, many people can achieve financial freedom in retirement simply by following the market.
But if you manage to get that kind of return, the chart above perfectly illustrates how effective compound interest really is. With annual returns of 10% and a weekly contribution of $500, it would take you less than 17 years to become a millionaire!
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