The Secret to Becoming a Millionaire
“The secret of getting rich slowly, but surely, is the miracle of compound interest,” says Princeton University Professor Burton Malkiel, author of The Random Walk Guide to Investing. If you start early and stick to it, you, too, can become a millionaire.
Compounding is really pretty simple — it’s just the process of earning a return not only on your original investment, but also on the accumulated interest that you re-invest. Benjamin Franklin described it best when he said, “The money that money makes, makes money.”
Double your money in 7 years. At 10-percent annual interest, $100 will become $110 after one year. That amount will earn $11 the next year, and the resulting $121 will give you a $12 return the third year.
The key is to leave your money in your account. That’s the most important factor in getting your money to multiply. The first couple of years may not amount to much, but it’s surprising how fast it will pile up. At 10 percent, your money doubles in a little over seven years. After 25 years, you’ll earn more every year than you put i to begin with
It’s even better, though, when you add to your investment every week or month. If you put in $500 a month and get a 10-percent return, you’ll have more than $7.5 million in 50 years.
Because of the compounding effect, even if you only contribute for 25 years, you’ll still have $7 million after 50 years. By that time, you’ll be making more than $600,000 every year — four times the entire $150,000 that you put in during the first 25 years!
Use the “rule of 72” to determine how long it will take to double your money at other interest rates, Malkiel says. Take the rate of return you will earn from an investment, and divide it into the number 72. The result is the number of years it will take for your money to double.
Grow your nest egg faster. When interest rates are low, you can expect to earn less than 3 percent from your bank. That means it will take you a lot longer to double your money. To get a 10-percent return, you’ll have to go to riskier investments.
Learn a million-dollar lesson
According to economist Burton Malkiel, here’s a good example of why you should start saving sooner rather than later. William and James are 65-year-old twin brothers. William set up an Individual Retirement Account (IRA) when he was 20 and contributed $2,000 per year until he was 40. James didn’t start his IRA until he was 40 but has continued to put in $2,000 per year. Both brothers earn 10 percent per year. Who do you think has more money today? Do the math, and you’ll find that William has almost $1.25 million, and James, who put in 25 percent more, has less than $200,000. That’s the miracle of compounding.
Malkiel encourages investing in index mutuaj funds. He points out that it doesn’t matter if you buy when the stock market is low or high, the sooner you start the better. Don’t depend on get-richqujc schemes that require investment at exactly the right time, he advises.
“Time is far more important than timing,” he says. “You can only get poor quickly. To get rich, you have to do it slowly, and you have to start now.”
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Category: Retirement
