Compound interest is one of the most exciting financial phenomena. Why? It’s earning interest on interest!
Get 10% in annual compound interest, and your $100 will turn into $110 after the first year (+$10), $121 after the second (+$21) and $133.10 after the third (+$33.10).
Notice that the amount of interest you earn each year increases exponentially. That can lead to some amazing things, given enough time.
Assuming a 7.5% annual interest rate, you’d become a millionaire in less than 38 years simply by contributing $100 per week.
Because of the way compound interest — well, compounds on itself — time is the most critical element. Given enough time, you don’t have to contribute much money to build true wealth.
Let’s take these concepts and look at how much money you’d get via compound interest depending on your weekly contributions, the interest rate and the amount of time.
Keep in mind that if you’re investing, there are real and nominal costs to consider such as annual fees, taxes and inflation. These are only illustrations to help you understand the relationship between time, interest, regular contributions and wealth.
5% Interest Rate
| Weekly Contribution | 10 Years | 20 Years | 30 Years | 40 Years | 50 Years |
|---|---|---|---|---|---|
| $50 | $33,445.87 | $87,925.66 | $176,667.50 | $321,218.60 | $556,677.12 |
| $100 | $66,890.19 | $175,847.26 | $353,326.84 | $642,422.38 | $1,113,328.56 |
| $250 | $167,226.24 | $439,620.17 | $883,321.18 | $1,606,063.37 | $2,783,334.24 |
| $500 | $334,454.03 | $879,244.40 | $1,766,650.52 | $3,212,141.56 | $5,566,694.16 |
| $1,000 | $668,906.52 | $1,758,484.75 | $3,533,292.88 | $6,424,268.30 | $11,133,362.64 |
Historically, you can invest in a low-risk, highly conservative portfolio and average a 5% annual return over decades.
Even with a conservative investing approach, by contributing $500 per week, you’d reach $1 million in less than 22 years.
7.5% Interest Rate
| Weekly Contribution | 10 Years | 20 Years | 30 Years | 40 Years | 50 Years |
|---|---|---|---|---|---|
| $50 | $38,030.90 | $116,413.78 | $277,963.38 | $610,922.20 | $1,297,160.85 |
| $100 | $76,060.04 | $232,822.20 | $555,913.94 | $1,221,816.21 | $2,594,261.82 |
| $250 | $190,150.99 | $582,058.17 | $1,389,791.26 | $3,054,554.63 | $6,485,684.49 |
| $500 | $380,303.73 | $1,164,121.72 | $2,779,595.34 | $6,109,137.46 | $12,971,428.85 |
| $1,000 | $760,605.71 | $2,328,238.07 | $5,559,177.85 | $12,218,246.72 | $25,942,797.83 |
The S&P 500 historically has averaged an inflation-adjusted annual return of about 8%. This chart assumes an ROI that’s a half-point shy of those historic returns.
At 7.5%, by contributing just $100 per week, you’d become a millionaire in less than 38 years.
10% Interest Rate
| Weekly Contribution | 10 Years | 20 Years | 30 Years | 40 Years | 50 Years |
|---|---|---|---|---|---|
| $50 | $43,304.50 | $155,625.23 | $446,956.26 | $1,202,593.93 | $3,162,523.45 |
| $100 | $86,607.01 | $311,243.27 | $893,891.89 | $2,405,132.36 | $6,324,900.94 |
| $250 | $216,518.51 | $778,111.77 | $2,234,740.05 | $6,012,858.66 | $15,812,325.33 |
| $500 | $433,039.02 | $1,556,230.72 | $4,469,500.72 | $12,025,772.82 | $31,624,796.61 |
| $1,000 | $866,076.05 | $3,112,454.26 | $8,938,980.82 | $24,051.490.14 | $63,249,447.26 |
It’s not easy to achieve a 10% annual return for a long period of time. It almost always requires beating the stock market, especially over 20+ years. That’s not necessarily a realistic or advisable goal due to the risks involved.
With the right approach, many people can achieve financial freedom in retirement simply by tracking the market.
But the table above is a great illustration of how effective compound interest really is. At 10% annual returns and a $500 weekly contribution, you’d need less than 17 years to become a millionaire!
Clark’s Investment Advice: Best Companies, Where To Put Your Money
Now that you know how powerful compound interest is, you may be wondering where and how to invest.
Clark’s favorite investment recommendation, especially in a tax-advantaged retirement account such as a 401(k) or IRA, is a target date fund. Clark calls these funds “the easy button” of investing. You simply pick the year closest to your retirement and dump all your investment money into them.
With a 401(k) account, you probably won’t have a choice as to the company that administers your account. But with an IRA — or if you’re investing on your own in a brokerage account — Clark prefers Fidelity, Schawb or Vanguard.
Need more of a strategic overview to paying off debt, saving and investing? Here’s how Clark looks at those three major financial staples.
