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Compounding How Can I Get Some? The magic of compounding can work for you even if you only have a small amount invested. What are some strategies you can use to increase your wealth using compounding? Set aside a small amount each week/month Postpone one large purchase Purchase a less expensive item Set Aside a Small Amount Each Week/Month Now see what happens if you reduce spending by $20 per week. That means bringing your lunch a few days instead of going out. Now at the end of 20 years you've saved over $51,000 ... and it all started with only $20 per week. Postpone One Large Purchase Another way to increase savings is to postpone large expenses. Suppose, for example, that you own a smaller, older television set, and you want to upgrade to a better TV that's on sale right now for only $500. What would happen if you postponed the purchase, perhaps just a year, and invested the money instead? Consider a 25-year-old who planned to retire at age 65. The 25-year-old invested that $500 at an assumed rate of return of 8% instead of buying the TV, and he or she left the money invested for forty years until retirement. The money grew to $10,862! Of course if you really need a new TV, how about buying a less expensive one and investing the rest? Which Would You Choose? Buy a $500 TV today - worth $0 in 10 years Invest $500 today, which could grow to $10,862 at retirement!* * This is only an example and does not reflect the return of any specific investment. This assumes an 8% annual rate of return invested for 40 years. Purchase a Less Expensive Item Assume that you need to buy a car. You've saved $4,000 for the down payment and secured financing at 6%. The only question is, "How expensive a car should I buy?" By purchasing the $15,000 instead of the $25,000 vehicle, you've reduced your monthly payment by $193. If you invest this $193 per month and earn 8% on your investment (see Investment Types Course for historical rates of return), you've accumulated $14,276 at the end of five years. Now your car is paid off. You stop investing the $193 per month, but you leave the $14,276 invested, where it continues to compound for 30 years. You've now accumulated almost $143,650 at the end of 30 years, simply by purchasing the less expensive car. Buy a Car at Age 30   Car 1 Car 2 Down Payment $ 4,000 $ 4,000 Monthly Payment (@ 6%) $ 406 $ 213 Monthly investment for 5 years only* $ 0 $ 193 Value of Investment at age 35* $ 0 $ 14,276 Value of Investment at age 65* $ 0 $ 143,650 * Assumes a 8% rate of return. This is an example only and does not reflect the return of any specific investment. Can you save more? It doesn't take much to make a difference. Cash Management Course If I saved just a little more each month, what affect would that have on my retirement? See Retirement Planning Quick Report. < PREVIOUS NEXT > #38599