Posted by

Saving money can be magical. Start small, contribute regularly, and through compounding returns amazing things happen! Compounding returns is a fancy way of saying that money in savings and investment accounts earns MORE money for you – it works for you. In a savings account, you earn interest. In an investment account you earn returns such as dividends, interest, and growth in value. These returns (real dollars) exist – not from your salary – but because you have money working for you.

Let's look at an example: imagine that you put $100 in an account with a return of 5% each year. At the end of the first year you'd have $105: $100 of your deposit and $5 return. You don't add money to this account; instead, you just let your money grow.

At the end of the second year, you'd have $110.25: $100 original deposit, $5 return from year one plus $5.25 return from year two. Notice that the return is higher the second year. This is because you've now earned return on the return from year one – this is huge over time.

How does that work if we use a long-term example? If a twenty-five year old deposits $5000 in an investment account (like a Roth IRA) and then lets this money earn compounding returns for 40 years (no money is withdrawn) until retirement, how much money would they have? If the $5000 earned 9% or better returns, over $150,000 would be in the account in 40 years. That's the magic of compounding returns!

Let time and compounding returns work for you. Start saving and investing now.

To set a savings goal, go to America Saves -- you can take part in the magic of saving too!