Compound Interest -or- Painless (Almost) Ways to Save More
People often ask financial advisors if we have any ideas on how they can save more for things like retirement or college or dream trips around the world. The answer is always yes, but some of our suggestions are not always welcomed with open arms.
Advice like, “Sell your house and move into something more modest,” or “Live below your means,” or “Save your bonuses instead of spending them,” is not generally the kind of thing folks want to hear. Sacrifices that big are tough to make, and many people are really just looking for a magic bullet.
There is no totally pain-free way to save, but even if you aren’t up for making major changes to your lifestyle, there are still things you can do to save more without too much sacrifice. Small adjustments can make a real difference over time thanks to the power of compound interest.
To illustrate what I mean, here’s a chart that shows how much you could save simply by skipping Starbucks two days a week and brewing coffee at home:
And here’s how much you could save over time, both with no return and with a 6% return compounded at 1, 3, 5, and 10 years:
If you have only a vague idea about how compound interest actually works, I recommend you watch Marshall’s video on this topic. He gives one of the most powerful demonstrations I’ve seen by showing actual coins multiplying (and disappearing) over time to visualize the alarming difference that postponing saving for even one year makes. Watch this video, and you’ll know why Einstein called compound interest “the 8th wonder of the world!”
As Marshall says, “No matter when you start saving, the most important dollar in your retirement is the first one you put in.” The sooner you start saving; the more wealth compound interest can build for you. Every dollar counts! And that’s the closest thing to a magic bullet anyone can get.