Compound Interest - A Powerful Tool For Preventing Debt

Many young people today who are just starting off in the work world share a common misperception. They believe that until they have enough money to make sizeable investments, it is not worth beginning their retirement savings. Although they completely realize the need to establish a regular pattern of savings they do not think that a small monthly amount would be worth the effort. Unfortunately for them this belief is absolutely wrong. The need has never been greater than it is today to adequately prepare for your future years. Failure to prepare can result in damaged credit and extensive amounts of debt. It is in an individual's best interest to use the assets that offer him the best chance to reach his goals. Two of the biggest assets that an individual possesses to accumulate retirement savings is time and compound interest. When these two factors are combined even a little bit goes a long way.

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Compound interest is the cumulative affect that an interest rate has on a principle amount over a given number of years. By waiting a long enough period of time even a small amount of money can grow into a significant amount. For example let's take an individual who is ready to begin his retirement saving. Let's assume that he can afford to invest $50 a month for a total of $600 in a given year. Let us also assume that he would be earning an annual rate of 8% If he retired in 20 years that $600 would then be worth $2,797. That's not bad at all. However, what would have happened if that same individual would have made that same investment 25 years earlier? In that scenario the $600 would have grown into $19,152.00. That shows the power of compound interest and the importance of starting early. And keep in mind that this total would continually be added onto as the years go on.

No one wants to reach the age of retirement and face the fact that they do not have enough money to live comfortably. No one want to face the possibility of living off of credit and amassing large debts. But just remember you do not have to face this bleak future. By starting your savings plan early and unleashing the power of compound interest your financial future is bright indeed.

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.