Building Wealth Slowly: Using the power of compound interest to build wealth

Many people think it is hard to become wealthy. It all depends on how you define it, doesn't it? If you think of wealth as having loads of money, in the millions, then yes, it may be hard to become wealthy for you. If on the other hand you think of wealth as having enough money to pay the bills and your money is invested wisely, and in a diverse manner, so that it makes you more money, then the answer is, no, it is not hard to be wealthy.


Assume you are just out of college, have a job with an income that allows you to pay your bills with a little left over. If you were to put a $150 a month into an IRA that grows at 8% a year, you will have about $605,000 at age 65. A 10% a year return on compound growth is about what you should expect if the money were invested in a no-load S&P 500 Index Fund. To some that may seem like a lot, but it really isn't, remember inflation eats away at any investment at a rate of 3 to 4% a year, as do mutual fund fees.


In the example above, for about $35 a week or $5.00 a day you would be on your way to being a millionaire. If you chose to live a little more frugal, you could easily save between $8.00 to $10.00 a day, or $56 to $70 a week. Saving $8 a day will result in $953,555 by age 65, and at $10 a day results in an investment growing to $1.19 million.


A simple example, if you deposited $100,000, OK many of us may not have that kind of money at the moment – it's just an example, and you left it alone for 10 years, here is what it would be worth if it earned 3%: $135,000. Not bad, not bad, considering you didn't do anything to earn $35,000. But, lets say you earned 9.05% interest, it would be worth $245,000, a full $110,000 more than at 3%. That's the power of compound interest and time. If you invest for the long-term in a higher paying investment account, you can more than double your money.


If on the other hand you contributed the full amount of $5,000 a year to a retirement account you would have $1.48 million. That's only about $14.00 a day and you could have a small fortune. If you decided to live without some expenses: using credit cards, extravagances, daily lattes, bought used cars instead of new, and invested your pocket change (about $30 a month) you could actually save well over $2 million before retirement.


Just remember, always invest your money diversely: stocks, mutual funds, high yield savings accounts, CD's, Mutual Funds, bonds, T-bills, so on. Your money may not grow as fast as if it were invested in only one more risky high paying interest investment, but at least you'll get there with less risk, and stress. Remember, time and the power of compound interest are on your side. The younger you are and you would like to build wealth, do whatever you have to scrape together your investment contributions. Every day you procrastinate is another day your money is not working for you.


Consider that most people are spending their lives paying to borrow other people’s money. If you save and invest, other people will be paying you to use your money. It’s a lot more fun to see your money working for you building wealth.


The older you get the harder it gets to grow your money slowly. If you wait until you are 32 to put away $4,000 a year at 10%, you would only have about $975,000 by 65. At 42, you would only be able to accumulate about $350,000 by 65. As you can see, your wealth diminishes the later you begin investing because it is not able to rely on compound interest to work for you.


The moral of the story, start investing today, invest often, and as much as you can. Also, every dollar you spend is not invested, so live a frugal and more wealthy life.