This article is part of a 30-day series called the 30 Steps Program to Financial Independence.
Have you ever hit the enter button on your computer’s calculator and watched the multiplication run endlessly until it reached a massive number? That’s essentially what compound interest does. If you have $100 at an interest rate of 5%, after one year, you’ll have $105. You could withdraw that $5 every year and still have $100 in the bank after 50 years. But if you leave that $105 in the bank, after 50 years it could grow to over $1100.
Sure, it’s tempting to touch the money as it grows, but what can you really do with a mere $5 each year? Now, having $1100 down the road is much more appealing, right?
There are plenty of online calculators that can show you how much your savings can grow, even accounting for your monthly contributions.
I could run through more calculations, but they vary for everyone. The key point is to **leave the money there** and be patient. Life will throw challenges your way—emergencies, new babies, illnesses, and other unexpected events. Try to find cost-effective solutions to these problems, be content with your current house or car for a bit longer, and let your money grow by itself.
There’s no secret to it: the more you save, the more interest you’ll earn. Even if you start small but start early, it makes a big difference. For example, saving $50 a month from age 20 to age 50 at a 3% interest rate will amount to $29,136.84. If you start just five years later, you’d only have $22,300. That’s a significant difference, considering we’re just talking about $50 a month for five years.
Higher interest rates mean higher returns. That same $50 a month, if invested at an average return rate of 8% for 30 years, would give you $74,517.97! As you get older, this number will keep growing until it reaches a point where it can cover your living expenses, and you’ll achieve financial independence.