Because of the way compound interest – well, compounded 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 through compound interest based on your weekly contributions, interest rate, and duration.
Keep in mind that if you are investing there are costs to consider such as annual fees and taxes. These are just 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 per week, you would reach $ 1 million in less than 22 years.
7.5% interest rate
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The S&P 500 has historically posted an inflation-adjusted average annual return of around 8%.
At this rate, by paying only $ 100 per week, you would become a millionaire in less than 38 years.
10% interest rate
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It is not easy to achieve an annual return of 10% over a long period. In fact, it probably requires beating the stock market. This is not necessarily a desirable goal because of the risks involved.
With the right approach, many people can achieve financial freedom in retirement simply by following the market.
But if you can manage to get that kind of return, the chart above is a perfect illustration of how well compound interest really works. With an annual return of 10% and a weekly contribution of $ 500, it would take you under 17 years to become a millionaire!
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