Читать книгу Horse Economics - Catherine E O'Brien - Страница 39

As you can see, you need to save for your retirement, and the earlier you start the better. For example, if you invest an initial lump sum of $3,000 in a retirement account that earns interest at a rate of 7.5 percent, compounded annually, and you continue to contribute the same amount each year, in 44 years, your account will reach $1,000,000! And, your actual cash outlay was only about $132,000—this shows the “power” of compound interest and is a good example of the “time value” of money.

Compound interest occurs when interest paid on an investment is added to the principal, so interest is earned on an increasingly larger sum. Interest can be compounded annually, semi-annually, monthly, weekly, or daily. The more compounding periods per year, the more your money will earn.

Obviously, the higher the interest rate, the more your investment will accrue. For example, let’s say Allison Smith wants to retire in 35 years with $750,000 in savings. In order to achieve this with an account that earns 6 percent interest annually, she will have to put in approximately $6,730 per year. In this case, her total cash outlay will be around $235,550. However, if her account earns 9 percent interest annually, she will only need to deposit $3,477 each year, and her total cash outlay will be much less—around $121,695.