Your Financial Goal: the amount of money you are trying to save. For most people, this would be the amount of money they hope to have at retirement.
Reach Goal In: Enter the number of years in the future when you hope to have achieved your goal.
Rate of Return: Enter an annual rate of return; for instance, the annual interest rate on a savings account, or the historical annual rate of return of an investment fund.
Savings, Interest, and Time Explained
If you save $1000 a year, how many years will it take you to save $50,000? No, not 50 years. Thanks to interest, your money will grow much faster. In fact, if you get an 8% rate of return on average, saving $1,000 each year over 50 years will leave you with well over $500,000. That's the power of compound interest. Compound interest makes it much easier to achieve your financial goals.
Compound Interest and Savings
If you are getting a 5% annual return on $1,000, by the end of the year you would have $1,050, an increase of $50. The next year, your 8% annual return would be calculated on $1,050 rather than $1,000 (just assuming you made no additional deposits). That would leave you with $1,102.50. The next year, your 8% would be calculated on that higher amount--and on and on each year. Of course, you accelerate the process greatly by adding more money to your savings each year.
Interest Rate and Savings
Of course, the higher the interest rate, the faster your money grows, and the more money you have at any given time. Compared with a 5% rate of return, a 7.5% interest rate means you'll have half again as big an increase at the end of your first year.
Over time, the higher rate of return really adds up. Even a tiny difference in rate of return can mean tens of thousands of dollars. For example, $100,000 invested at 5.5% gets only $500 more than at 5% at the end of a year. But thanks to compound interest, after 20 years, the difference is $26,446. For a couple whose house is already paid for, that might mean an entire year or two of retirement. Tens years later, after 30 years of investment, the difference between 5% and 5.5% is $66,201. How many years of retirement is that?
So you see, a higher rate of interest, even a slightly higher rate, can really help you reach your goal faster.
How can you get a higher rate of return? The answers aren't easy. Over time, investments in stocks tend to do much better than most other investments--on the whole. There are, of course, companies whose stock becomes worthless. In less extreme cases, there are stocks that simply muddle along and barely keep pace with inflation. So, you can make big money in the stock market, but there are risks. You have to balance risk and reward. Traditionally, the best advice is to balance your risk with a diverse stock portfolio. That is, own stocks from a variety of different corporations, not just one corporation or one industry. An investment fund, such as an index fund or mutual fund, will do this for you.
In order for you to realize these gains, you have to keep your money in the investment the entire time. If you take money out at any point, you will lose not only the amount you've taken out, but also future interest you would have gotten on that amount. With many investments, including many bonds and CDs, there is also a penalty for withdrawing money early.