The true cost of consumption

Did you know that when you spend money it costs you more than what you spend? Yes, remember compound interest? If you spend/consume $1000 per year, which equates to $83.33 per month, for the next 40 years, do you know how much that really costs you?

If instead of spending/consuming that $83.33 a month, you decided to invest it and you earn 8% in interest, in 40 years you would have $259,000. Wait, what? Why won’t you just have $40,000 ($1000 X 40 years)? It’s simple, my friend, that’s the power of compound interest. Your initial investment of $1000 earns interest, then the next year you earn interest on your original amount plus the interest that you earned plus you earn interest on the new amount you invested. Isn’t that awesome? You have got to love compound interest.

Year Amount
1 1,000
2 2,080
3 3,246
4 4,506
5 5,867
6 7,336
7 8,923
8 10,637
9 12,488
10 14,487
11 16,645
12 18,977
13 21,495
14 24,215
15 27,152
16 30,324
17 33,750
18 37,450
19 41,446
20 45,762
21 50,423
22 55,457
23 60,893
24 66,765
25 73,106
26 79,954
27 87,351
28 95,339
29 103,966
30 113,283
31 123,346
32 134,213
33 145,951
34 158,627
35 172,317
36 187,102
37 203,070
38 220,316
39 238,941
40 259,056

Okay, some of you might say, I don’t have $1000 a year to invest. Are you sure? Remember $1000 is $83.33 per month, which is $2.78 per day (83.33/30). You have that don’t you? Forgo your expensive Star Bucks coffee or a large drink at the fast food restaurant. Better yet, pack your lunch and save that money. How much do you think you can save by doing that?

This is a tough economy and banks won’t give you 8% interest on a savings account. However, if you start there and build it up, you can probably find a nice money market account to invest your money in after it grows. Then, after that grows, you can invest it in a mutual fund where you’ll earn a higher rate of interest. Remember that mutual funds do carry risk and if the fund goes down, you lose money. Generally, the higher the interest rate, the higher the risk.

Also, remember that mutual funds can have a load. A load is basically a fee that gets tacked on for managing your fund. You want a no-load fund or a fund with a very low load.

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The second image links to www.thepennyhoarder.com site’s article about common retirement mistakes. 

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