Many of you probably guessed that Caroline (Ana) came out much better compared to Jack (Shawn). Caroline ended up with almost a million dollars and Jack ended up with half that.
It all about 2 things: TIME and COMPOUND INTEREST.
Interest is defined as the cost of borrowing money.
Simple interest is calculated only on the principal amount of a loan.
Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as “interest on interest.” This compounding effect can make a big difference in the amount of interest payable on a loan if interest is calculated on a compound rather than simple basis.
***think of compound interest as exponential.
On the positive side, the magic of compounding can work to your advantage when it comes to your investments, and can be a potent factor in wealth creation.
Basically you like compound interest on savings and investments but loathe it when it comes to car payments and mortgages.
The good news is that it is never too late to get into the “savings” game.
So, if you are 40 years old and haven’t saved, don’t fret yet. I ran the numbers and if you start saving $1000 a month for the next 25 years with an average interest rate of 7%, you will end up with
And if you have waited even longer and are 50 saving for 15 years using the same numbers you can look at $304,307.30 saving $1000 a month, and $608,614.59 saving $2000 a month.
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