Personal Finances - Savings Calculators And The Power Compounding Interest

In the last article I explained the reasons for saving small amounts of money over a long period of time. I showed how this is extremely important in achieving personal financial freedom and how it is clearly not something that we can just choose to ignore.

This article is intended to show how personal financial freedom can easily be achieved for anyone who has time and small amounts of savings overtime. It shows how starting immediately with small amounts of money can help you to have millions of dollars in the future.

If I told someone that all they had to do to achieve financial freedom was start with $20,000 and have about 30 years they would almost surely not believe me. I am here to tell you all that this is indeed true. This is a very basic personal financial advising tip that all people should know about. The ultimate key to financial freedom is time and money.

The idea that I am explaining is called the power of compounding interest. You can find many good examples explaining the concept of the power compounding interest but most fail to provide simple examples that readers can easily relate too.

Example:

There are two 18 year old guys that are about to graduate from high school. Upon graduation they will both be receiving a gift from their parents.

Jim will be getting $20,000 from his parents and putting it in a savings account and John will be getting $20,000 and putting it into a mutual fund. Jim's parents have also decided to deposit another $20,000 into his savings account each year until he retires.

In both situations the children have agreed to not spend their graduation gifts until they retire.

Of course it sounds like John got the shaft and Jim has an amazing deal right? Wrong! Think again! I will explain below.

For this example we will be assuming that Jim's saving account earns 3% per year and John will earn 10% per year through his mutual fund.

After getting their gifts Jim and John decide that they will compare the values of their accounts at each 10 year high school reunion and then at retirement. The results are listed below.

At the 10 year reunion, Jim and John compare their accounts. John's account is now valued at just over $54,000 and Jim's account is valued at just over $232,000.

At the 20 year reunion, Jim and John once again compared accounts. John's account is now valued at just over $146,000 and Jim's account is valued at just over $547,000.

At the 30 year reunion Jim and John compared account for a third time. John's account is now valued at just over $396,000 and Jim's account is valued at just over $977,000. Of course John still feels like Jim got a better deal.

John and Jim both decide to retire at 68 years of age and at this time they get together again to compared accounts. John's account is now valued at $2,907,398 and Jim's account is valued at $2,314,612.

John's parents gave only $20,000 while Jim's gave exactly $1,000,000 and in the end John has more money. This happened because of the power of compounding interest. John only ended up with more money because he was making 10% per year for a long period of time while Jim was only earning 3% per year. This is an excellent example that shows how taking control of your personal finances today and beginning to save can help you to achieve financial freedom.

Jim is happy to take $2.3 million dollars but does not realize that if he would have had his money in a mutual fund at 10% instead of his 3% savings account he would have had over $28 million at retirement.

Please follow these simple personal finance tips and get started on your way to financial freedom.

Jesse Chettle is a self-made Personal Financial Advising expert who specializes in giving out free Personal Financial Advice over the internet. You can visit his blog Savings Calculator and Personal Finance Budgeting blog to learn more.

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