AARP Financial

The Power of Starting Early


When asked what is the greatest invention the world has ever known, Albert Einstein replied, "Compound interest!"

The power of compounding is indeed amazing. Over time an initial investment may grow considerably. As the example below illustrates, if you were to invest $100 each month for 20 years at an earnings rate of 7%, this periodic investment would grow to a total of $48,710.

The principal itself would earn nearly $17,000, but — more notably — the compounding effect would generate over $7,800 in additional earnings, an increase of more than 46%.

Compounding earnings and regular contributions boosts investment value

Source: AARP Financial Inc.

  • Principal investment is $24,000 — $100 a month for 20 years
  • 7% net earnings rate is assumed for this analysis
  • Earnings on principal is almost $17,000
  • Compounding boosts earnings by over $7,800, or by over 46%

Investing with a long-term view may be a better way

Compared to mutual fund investments, today's savings accounts may pay very low rates of return. A savings account paying 2.0% on the same $100 monthly investment for 20 years shown above would have a final value of only $29,677. Of that, the compounded interest earned would only total $5,578.

So, when you're considering optimal ways to give to your grandchild, remember the value of compounding.

To learn more about the investing potential of mutual funds, speak to a AARP Financial Advisor. Call 1-866-218-6142, Monday to Friday, 8:00 a.m - 6:00 p.m. Eastern Time.

This example does not take taxes into consideration.