It’s cliched to point out Albert Einstein’s famous quip that compound interest is the most powerful force in the universe, but our favorite physicist had a point. By saving and reinvesting returns from your savings over time, even small amounts of money become the foundations for significant nest eggs. Below, I’ll provide two examples that show how a lump sum can grow over the years at different rates, and how saving more modest amounts consistently produces outsized outcomes in the long run.
Let’s say that you had a lump sum of $100,000 to invest. It may surprise you just how much you would have after 30 years if you did nothing more than simply keep it invested. Over the long run, bonds return on average 2-3% each year while stocks return about 7%. Here’s what your $100,000 could turn into at those long run market rates:
Single Lump Sum Returns
|
Year |
@ 3% return |
@ 7% return |
|
0 |
$100,000 |
$100,000 |
|
5 |
$115,927 |
$140,255 |
|
10 |
$134,392 |
$196,715 |
|
15 |
$155,797 |
$275,903 |
|
20 |
$180,611 |
$386,968 |
|
25 |
$209,378 |
$542,743 |
|
30 |
$242,726 |
$761,226 |
Without doing anything other than letting your investment remain invested and compound, you could multiply that initial $100,000 into 2.4x or 7.6x the amount by getting the market rate returns on bonds and stocks respectively.
Most people don’t invest just once though. Successful investors make a habit of saving, contributing to their investment accounts month in and month out throughout their careers. Here’s what a few different savings levels could turn into if invested into portfolios that mirror the stock market’s return of 7% after inflation in the long run:
Ongoing Savings of Various Amounts at 7% Return
|
Year |
$2,500/month |
$5,000/month |
$10,000/month |
|
0 |
$0 |
$0 |
$0 |
|
5 |
$182,526 |
$365,053 |
$730,105 |
|
10 |
$437,736 |
$875,472 |
$1,750,945 |
|
15 |
$799,528 |
$1,599,056 |
$3,198,112 |
|
20 |
$1,312,413 |
$2,624,827 |
$5,249,654 |
|
25 |
$2,039,493 |
$4,078,986 |
$8,157,971 |
|
30 |
$3,070,219 |
$6,140,437 |
$12,280,875 |
As you can see, it doesn’t take too long for that consistent savings habit to add up to big nest eggs. An important aspect of this is just how much is return versus contributed dollars. In the middle example, contributing $60,000 per year (12 x $5,000 / month) for 30 years adds up to a total of $1.8m. That means that $4.3m of the expected amount at the end of 30 years is return on your investment.
Clearly, good things come to those that develop a savings habit and stick to it.