Course 102: The Magic of Compounding
Why Is Compound Interest Important to Stock Investing?
In this course
1 Introduction
2 The Components of Compound Interest
3 Who Wants to Be a Millionaire?
4 Time Is on Your Side
5 Why Is Compound Interest Important to Stock Investing?
6 The Bottom Line

In addition to the amount you invest and an early start, the rate of return you earn from investing is also crucial. The higher the rate, the more money you'll have later. Let's assume that Luke from our previous example had two sisters who, at age 24, also began saving $2,000 a year for six years. But unlike Luke, who earned 12%, sister Charlotte earned only 8%, while sister Rose did not make good investment decisions and earned only 4%. When they all retired at age 65, Luke would have $1,074,968, Charlotte would have $253,025, and Rose would have only $56,620. Even though Luke earned only 8 percentage points more per year on his investments, or $160 per year more on the initial $2,000 investment, he would end up with about 20 times more money than Rose.

Clearly, a few percentage points in investment returns or interest rates can mean a huge difference in your future wealth. Therefore, while stocks may be a riskier investment in the short run, in the long run the rewards can certainly outweigh the risks.

Next: The Bottom Line >>

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