Visit Dave Ramsey’s Investing Calculator (new window) (http://www.daveramsey.com/smartvestor/investment-calculator) to calculate the power of compound interest. It will help you see how you can earn income by putting to work a part of your paycheck, gifts of money, and extra income. On completion of this assignment you will understand how to build wealth through regular saving, diversified investing, and using the power of compound interest. Feel free to play with the compound interest calculator by adjusting interest rates, dollar amounts, and time. Use the tool to align your current situation with your financial plans and retirement goals. ??a. Suppose you are a 22 year old college graduate who just started working. While your current savings (or starting balance) is $0, you create an automatic deposit of $60 a month (about $2 a day or $720 a year) starting with your first paycheck. In other words, assume you directly deposit $60 a month into a well diversified investment account earning 7% interest compounded yearly from now until you retire at age 67. How much would you have in the account 45 years from now when you retire at 67? (Enter numbers only, no dollar sign or comma. For example, if your answer is $156,241 then enter 156241 as your submission.) $ b. Assume that you decide to wait until you are age 30 to save for retirement. That is, you delay savings for 8 years. Then you start automatically depositing $60 a month or $720 a year at 7% compounded annually. How much would you have in the account after 37 years when you retire at 67? (Enter numbers only, no dollar sign or comma. For example, if your answer is $86,348 then enter 86348 as your submission.) $________ c. Compare your answer from Question (a) to Question (b). How much less money do you have at retirement because you waited 8 years in order to start saving? That is, subtract your answer from Question (a) from your answer from Question (b). ? (Enter numbers only, no dollar sign or comma.) d. The total value from Question (a) is divided into two parts. How much is from total contributions (i.e. the cumulative amount from your paycheck)? This should be the $720 x 45. (Enter numbers only, no dollar sign or comma to the nearest dollar) _ c. ?The total value from Question (a) is divided into two parts. How much is from total interest? (Enter numbers only, no dollar sign or comma.) _
The Correct Answer and Explanation is :
Investing early and consistently is crucial for building substantial retirement savings, thanks to the power of compound interest. Let’s analyze the scenarios you’ve provided:
a. Starting at Age 22:
If you begin investing $60 monthly ($720 annually) at age 22 into an account with a 7% annual return, by age 67 (45 years), your investment would grow to approximately $205,740.
b. Starting at Age 30:
Delaying your investment start until age 30 means you’ll have 37 years to invest until age 67. Under the same conditions, your investment would grow to approximately $115,443.
c. Impact of Delaying Investment:
By waiting 8 years to start investing, you would accumulate approximately $90,297 less by retirement.
d. Total Contributions:
Over 45 years, contributing $720 annually results in total contributions of $32,400.
e. Total Interest Earned:
The interest earned over this period would be approximately $173,340.
Explanation:
These calculations highlight the significant impact of starting your investments early. By beginning at age 22, you not only contribute more over time but also allow your investments to compound more effectively. Compound interest means you earn returns on your initial investment and on the accumulated interest from previous periods. The longer your money remains invested, the more pronounced this compounding effect becomes. Delaying your investment reduces both the time for contributions and the potential for compound growth, leading to a substantially smaller retirement fund. Therefore, initiating regular investments early in your career is a strategic move to maximize your retirement savings.