The power of compound interest versus the penalty of procrastination: An example

This page demonstrates the increase in wealth that results from early reinvestment. For a simple example, if $1,000 were invested in a savings account at 7% interest, compounded annually, at the end of the year there would be $1,070. Now if the $70 interest were withdrawn from the account, there would be no compound return, as there would be no reinvestment. If the $70 were left in the savings account along with the original $1,000 investment for another year, 7% interest would be earned on the $1,070 total. This would produce a final amount after two years of $1,144.90.

Now, for a more thorough demonstration, here we’ll look at our two twins – Smart Sam and Larry the Late – and how they’ve adopt different savings patterns. Sam starts at a young age and invests $4000 every year for 15 years, while Larry waits fifteen years to begin, and then invests $4000 each year for 30 years – with some eye popping results.

Meet Sam and Larry, the twins, aged 22.

Smart Sam		Larry the Late
Smart Sam deposits $4,000 per year, for 15 years. Sam decided to stop investing and leaves the money to grow at 4% return. 30 years later, Sam’s money has grown to $270,168. Sam only deposited (invested) a total of $60,000. His total return is $186,170.		Larry the “Late” twin was always procrastinating, never saving a penny in the same 15 years. Larry then started investing $3,000 per year, for 30 years, earning 4% return. After 30 years, Larry’s money has grown to $233,313. Larry started late and invested $120,000. His total return is $113,313.

 
Sam's results in detail (click to expand)Collapse

Larry's results in detail (click to expand)Collapse