Watch Your Savings Grow

Need motivation to save and invest?  Here are some charts that can help you find that motivation.

Do you put money into your savings / investment account every month?  Good for you!  Do you ever wonder if it’s worth it?  After all, month by month it doesn’t seem to make much difference right?  Well, you’re wrong!  It makes a huge difference and I’ll show you why.

If you are a monthly saver then you should know the two basic financial concepts that convert your monthly savings into huge long term savings accounts.  Specifically, they are the time value of money and the compounding effect of interest rates, also known as the compounding effect of money.  Here’s how they work:

First, let’s say you save $100 per month.  In five years you would have put $6,000 into savings (12 months x $100 per month x 5 years).  If you were earning 1% on your savings account, the value of your savings would have grown to $6,150 ($150 in return).  If you were invested in investments that earned 7%, the value of your savings would be $7,159 ($1,159 or 19% return).   See the table below for a summary of how $100 per month grows at different rates of return. As you can clearly see, the rate of return that you get on your monthly savings makes a huge difference in how fast your money grows.  The compounding of the monthly returns is known as the compounding effect of money.  This compounding effect is leveraged even greater when you add in the second effect, known as the time value of money.  The time value of money works over the many periods you have invested.  To see the time value of money illustrated in the table below, follow the columns down.

For example, the $100 per month at 5% will be worth $6,801 in 5 years ($801 or 13.4% return) but $15,528 in 10 years ($3,528 or 29% return) and $59,551 in 25 years ($29,551 or 98.5% return).  In 50 years you would have invested $60,000 ($100 per month x 50 years x 12 months per year) but your savings would be worth $267,000, or more than 4 times the amount you invested.  In fact, if you were able to get a return of about 9%, your $100 would grow to a million or more in 50 years!

Now imagine investing $200 per month?  $300? $1,000?  Imagine what kind of savings account you could have at retirement!  The next step is to find a way to increase your monthly savings contribution….

Tagged as: compounding effect of money, money growth, save money