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Compound Interest & Retirement

Compound Interest and Retirement
Key Points
  • Albert Einstein thought compound interest was the eighth wonder of the world
  • Saving for retirement is a skill that can be learned
  • What you need for retirement depends on you

Are you planning to retire early with enough money in your savings account? There are a lot of things that you need to know, so you can prepare everything properly. You need to learn more about compound interest and retirement and how this interest can help you build up your savings quickly. Learning more about this interest can help you achieve all your dreams for your retirement period as soon as possible. If you would like to manage your finances and do a financial checkup, you may want to include this interest in the calculation.

What Is Compound Interest?

Compounding or compound interest is the interest on the deposit that you put into the bank. This interest will be calculated based on the initial capital. This interest will accumulate from time to time. It is commonly known as interest on interest. When you use this type of interest properly, it can be used to make your account grow faster than using simple interest. The rate of interest will depend on the frequency of compounding. For example, the total amount of interest accrued on the $100 account (which is compounded at 10% annually) will go lower than the interest (which is compounded at 5% semi-annually).

To enjoy all the benefits of compound interest, you may want to put the interest back into account. After you take this step, your interest will get another interest next period. The basic rule for this compound interest is that the longer the compounding period is, the greater the total amount of compound interest you can make in your account. For example, A $100,000 deposit that gets 5% annual interest will get up to $50,000 as the total interest for about 10 years. However, if this deposit gets a compound interest of 5% on the deposit period, you will get about $62,000 as the interest.

Related: Importance of Investment Diversity

Learn More: Alternative IRA Investments

How Much Can You Save For Your Retirement?

Many people want to know how much money they need to save for their retirement period. If you want to have a comfortable retirement period, you need to have enough money in your account. How much you can save for your retirement depends on your income and savings, even though you want to start investing from the age of 20s, 30s, or 40s. Before you start saving for your retirement, you also need to prepare an emergency fund for yourself and your family.

An emergency account is a cash that you prepare in your savings account for unexpected expenses. For example, when your car breaks down and you need immediate repair, you can consider using this fund without having to cause burdens on your finances. Many financial experts recommend their clients have up to 3 – 6 months’ worth of expenses. After you have the emergency fund, you can start calculating the total amount of money you need for the retirement period. It will depend on many factors, including your total income, your planned retirement period, and the lifestyle that you want to have after you retire.

The amount that you need to save for retirement can be calculated based on your age and total income. For example, most people with around $60,000 income per year will need to have savings at least

  • 1 x income (by the age of 30s)
  • 3 x income (by the age of 40s)
  • 5 x income (by the age of 50s)
  • and so on

You may want to save up to 15% of your total income for retirement savings. It may seem to be difficult for the first time, but you may want to learn how you can start saving your money for your retirement. If you cannot start with $500, $100, or even $50 per day, you can consider doing the micro-saving strategy. You can save less than $2 at a time. It will help you add to your savings consistently without having to feel the pressure of saving massive amounts of money all at once. You can use a financial calculator to calculate the total amount of money you need to invest every month to achieve a specific amount of money in your retirement period.

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