Become A Millionaire

No, this is not a get rich quick scheme. It is get rich "sure" scheme, based on a simple mathematical concept, compounding. The power of compounding is one of the few guarantees in personal finance. The only risk is not living long enough to see the benefits, but in such a case, one's heirs will get the benefits:-) Unfortunately, compounding is about as interesting as watching glue dry, water boiling, or moss growing on trees. It eventually happens but there is no excitement and the process is painfully slow.

Some Examples

Most people have probably quit reading this post by now. Why? After hearing about "compound interest, " many have already decided it's not for them, perhaps because it involves saving or too much time. I remember when a colleague presented the concept of compound interest with high school students. They became visibly disinterested once the approach was shared.

For those still reading, here's some doable examples of how compound interest can help a twenty year old become a millionaire by retirement age:

	Become a Millionaire - Guaranteed
Monthly (Daily) Contribution	Yearly Interest Rate	Total Paid	After 40 Years
$158.15 ($5.12)	10%	$75,912	$1,001,083
$381.00 ($12.43)	7%	$182,880	$1,000,053
$846.10 ($27.75)	4%	$405,150	$1,000,872

For reference, I chose the interest rates of 10% and 4% because they have been demonstrated as achievable. From 1986 to 2005, the S&P 500 had a 12% return and the 10 year treasury yields have rarely been below 4% since 1962. For those that want to try different contributions levels, interest rates and time frames, use this calculator by Bankrate.com.

Benjamin Franklin once wrote, "In this world nothing can be said to be certain, except death and taxes." For me, using compound interest to become a millionaire gets pretty close :-)

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC