Superhero movies are all the rage of course, and the characters’ range of superpowers seemingly knows no bounds. From X-ray vision to towering strength, people love superpowers.
Well, if you’re in your 20s, you, too, have a superpower that you might not know about yet. It’s called “time.” And no, I’m not kidding.
When it comes to growing wealth, time is the most important factor, and if you’re in your 20s, time can have an almost magical effect on your finances thanks to compound interest. Compound interest is like a magic money trick that, if you harness it early by saving or investing with a brokerage, can make you rich later in life with minimal effort.
Truly, if I could go back and tell my younger self one financial tip, this would be it.
What is compound interest?
Compound interest is basically interest earned on interest. Here’s how it works: Let’s say you put $1,000 into a savings account, and that $1,000 earns you $40 in interest in a year. Now you have $1,040 that is earning interest instead of just the $1,000 you originally put in. Interest keeps building on top of the higher amount.
When you save or invest money, and you leave the interest to grow inside the account, that money is not just calculated on the initial amount you put in (the principal) but also on the interest that money earns over time. It’s like a snowball rolling down a hill, getting bigger and bigger the longer it rolls.
Why does it matter if you start in your 20s?
The earlier you start making compound interest work for you, the longer you give it to work its superpower magic. Starting to save and invest in your 20s gives your money a much longer runway to grow. If you wait until your 30s or 40s, you’ll miss out on years of compound super growth.
Say you invest $200 a month from age 25 to 65 at an average 7% annual return. By the time you’re 65, you’d have over $482,000. However, if you wait until age 35 to start, even with the same $200 a month and 7% annual return, you’d end up with only about $228,000 — less than half. Why? Because you’d miss out on an extra decade of compound growth.
It’s easier than you think
Compound interest over time really is a money superpower. And you don’t need to be a financial expert to get started. Simply setting up an automatic contribution to a retirement account like a 401(k) or individual retirement account (IRA) can put you on the right track. Even better — many employers offer matching contributions to 401(k) accounts, which is essentially free money. In that case, you have a Robin to your Batman.
Looking for a broker to help get you started? Check out our list of the best online brokers for beginners.
Play the long game
The key to reaping the full benefits of compound interest is consistency and patience. This is a long-term strategy, not a get-rich-quick scheme. The stock market will go up and down in the short term, but over time, it has historically delivered solid returns. The earlier you start and the longer you leave your money invested and allow the returns and interest to compound, the more powerful the compounding effect becomes.
If you’re in your 20s, the best thing you can do for your future self is to start saving, investing, and compounding now. Compound interest might seem like a boring financial term, but it’s the closest thing to magic when it comes to growing wealth.
