How to Use the Power of Compounding To Save For Retirement ?

Compound interest is the eight wonder of the world. So said Albert Einstein. Saving for retirement is a struggle for many workers especially middle and poor-income American workers. However even saving a little everyday can help build a nice nest egg. The following example, shows the power of compounding returns by skipping coffee at expensive premium shops and saving that $3.50 each day.

The return below is based on investing that $3.50 each day for 30 years in a low-cost diversified Roth IRA earning 6% annual return according to an article by Fran Kinniry at Vanguard. After 30 years that account would have grown to $106,000. This is indeed a nice chunk of change to have in retirement.

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He quotes an interesting tidbit about Warren Buffet’s similar line of thinking. From the article:

As a young man, Buffett wondered if he really wanted to spend $300,000 for a haircut.1 By getting his locks trimmed every five weeks instead of four, and spending $18 instead of $25, Buffett estimated he’d save an estimated $300,000 over his lifetime.

1 Alice Schroeder, 2008. The Snowball: Warren Buffett and the Business of Life. New York: Bantam Books.

Source: $106,000 for coffee? Let’s talk compounding by Fran Kinniry, Vanguard

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