Harnessing the power of compound interest is one of the keys to building wealth over time. Simply put, compound interest means the interest on an investment grows exponentially—rather than linearly—over time. What this means for a retirement account like a 401(k) or Roth IRA is that every little bit you contribute goes a long way, especially compared to a traditional savings account. Even small, consistent contributions can grow substantially thanks to compounding returns.
Why you need to set aside a little money every day
These all assume a moderate 6% annual investment return on retirement funds (which is around what many return on investment calculators will be set to automatically). I use the Investor.gov calculator. I plug in a zero dollar initial investment, an annual compound frequency, and round to 30 days a month for these calculations. Here's a look at how your savings would grow if you set aside $1, $5, $10 or $20 per day and invested it for the long run.
Saving $1 per day
If you put $1 per day (or around $30 per month) into an investment earning 6% annually, here's how it would grow:
After 10 years: $4,745
After 20 years: $13,242
After 30 years: $28,460
Saving $5 per day
By setting aside just $5 per day (or around $150 per month) and investing it at a 6% return, your savings would grow to:
After 10 years: $23,725
After 20 years: $66,214
After 30 years: $142,304
Saving $10 per day
Increasing your daily savings to $10 per day (or around $300 per month) would result in the following projected growth:
After 10 years: $47,450
After 20 years: $132,428
After 30 years: $284,609
Saving $20 per day
And saving $20 each day (or around $600 per month) would compound to:
After 10 years: $94,901
After 20 years: $264,856
After 30 years: $569,218
It's important to note that with compound interest, how early you start saving usually outweighs how much you contribute. Even an investment left untouched for decades can keep growing. Still, it's never too late to start saving, and consistency sure does pay dividends. To run the numbers yourself, here's the Investor.gov calculator that allows you to test out different saving scenarios that work for your financial situation. Start small if needed, but develop the daily habit. Harnessing compound interest is a powerful way to build wealth over time through regular saving.