Retire A Millionaire

The world is full of empty promises. Advertisements tell us to buy an amazing cream because it will make us beautiful, or to buy that weird-looking contraption because it will tone our muscles and make us popular. Invest money now and I'll help make you a millionaire, or at least comfortably well-off in your adulthood.If you leave your money to grow for a long time, $100 can turn into a million dollars. No, seriously. How? Through compounding.

The Magic of Compounding

If you're not the type who enjoys math class, who delights in solving for X and figuring out how long it will take a plane to get from Los Angeles to New York if it's going 650 miles per hour, you might expect this section to be boring. It's all about numbers, after all. Give it a chance, though, these numbers will show you how money grows and how millionaires are made.

Just how fast compounding can be depends on three factors:

How much money you invest

How much time it spends growing

Its rate of growth

Let's look at some examples, to see how it can work.

Compounding is when something grows over time, and the amount by which it grows is also growing. It's much easier to understand when you consider some examples. Let's start with a simple example. We'll use 10% as our annual growth rate and start small, with $100. Let's call this Year 0, when we start with $100. One year later, in Year 1, our $100 has grown by 10%. Since 10% of 100 equals $10, we add that to our money and end the year with $110. Got that? (Note: Remember, to find out what 10% of anything equals, just multiply the number by 0.10. To find 5%, multiply by 0.05. For 25%, by 0.25.)

In Year 2, we add another 10%. But this time you don't end up with $10. Ten percent of $110 is $11. So we end Year 2 with $121 ($110 plus $11 equals $121). In Year 3, we add 10% again, or $12.10. Our new total is $133.10. Here's a table that will make it clearer:

Year 0 you invest $100, mutiply by 10% which equals $10

Year 1 you invest $110, mutiply by 10% which equals $11

Year 2 you invest $121, mutiply by 10% which equals $12.10

Year 3 you invest $133.10, mutiply by 10% which equals $13.31

Year 4 you invest $146.41, mutiply by 10% which equals $14.64

Year 5 you invest $161.05, mutiply by 10% which equals $16.11

Year 6 you invest $177.16, mutiply by 10% which equals $17.72

Year 7 you invest $194.88 mutiply by 10% which equals $19.49

Do you see what's happening? Your initial bundle of $100 is growing, and the amount by which it's growing is also growing. That's compounding in action. In just eight years, you doubled your money. If you had just added 10% of $100 each time, that would have been $10 every year, and you'd have ended up with $180. But since your money was compounding, it grew faster.

Now that's magical, isn't it? Here are a few key things to notice:

You started with just one single investment of $100. In Year 25, your wealth grew by $108! In that single year, you made more than your entire initial investment. And the following year, you made even more than that.

Notice how large the total gets. You started with $100, but in 50 years, that's become almost $12,000. (A stickler might point out that thanks to inflation you won't be able to buy as much stuff in 50 years with that $12,000 as you could buy with $12,000 today. But then, today you just have that $100. You're still coming out way ahead.)

Notice that the longer you let your money compound, the more massive each year's growth becomes. In the first years, you just added $10 or $20 or $30 per year. But after 25 years, you're adding hundreds each year. Compounding gets more powerful the longer it's left to work.

The Growth Rate

If you're not yet finding this fascinating, then perhaps the next few tables will do it for you. Remember that we used a growth rate of 10% in our example above. The growth rate -- how fast your money grows, on average, from year to year -- is very important. Let's start over, using $100 again, but compounding at three other rates of growth: 5%, 11%, and 15%. Five percent is what you might earn in interest in a bank account in some years, or on a certificate of deposit or on some bonds. Eleven percent is the historical average growth rate per year of the stock market for most of the last century. Fifteen percent is how fast your money might grow if it were invested in a bunch of top-notch companies that you selected on your own.

Again, see how the amount by which the sum grows is increasing as the years go by. For example, growing at 11%, your total increases by around $200 between years 10 and 15. But in a later five-year period, between years 40 and 45, your total grows by more than $4,000!

Don't let these long time frames put you off. If you're 15 years old now, you probably can't imagine being 55 or 65. That's reasonable. Soon we'll discuss how you can move things along more quickly. Just let these tables show you how compounding works and how it gets more and more powerful as the years go by.

Finally, notice what a huge difference the growth rate makes. If your money is growing at 15% instead of 5%, you'll end up with about four times more money after 15 years. Even though 11% and 15% might not seem so far apart, over 20 years, you'll end up with twice as much money. Stretch that out over 50 years, and you'll have nearly six times more money at 15% instead of 11%.

Notice that, growing at 15% per year, a single $100 investment can turn into more than $100,000 over 50 years.

Keep in mind that not all growth rates are the same. If your bank is paying 3% interest on your savings, that's pretty much guaranteed money. If a savings bond is paying you 5% interest, that's also darn close to a sure thing. The stock market, however, is not a sure thing, and neither are some bonds issued by companies. Stock market returns fluctuate. There are good years, great years, so-so years, and years we'd much rather forget. Over long periods of time, though, the stock market tends to go up. Over many decades, it has averaged an annual 11% return.Similarly, with companies, many remain strong for decades or a century. Others fail. If you select and invest in solid, growing companies, you can hope to earn as much as 15%, on average, per year. If you select one or more companies that turn out to be remarkable growers, such as Microsoft, the average growth rate for your investments might be higher than 15%. You should now have a sense of how money can grow over time, and how much growth rates matter. Now let's turbocharge our results by upping how much money we start with. Instead of starting with an initial investment of just $100, let's see what happens with $1,000.

By the way, if $1,000 seems like an awful lot to you, realize that it's really only $20 per week. Accumulating $20 per week to save isn't as difficult as you may think.

If you start with $1000, and it grows at 5%, 11%, and 15%, here's how much you'll have after various periods of time:

Year 5% 11% 15%

5 $1,276 $1,685 $2,011

10 $1,629 $2,839 $4,046

15 $2,079 $4,785 $8,137

20 $2,653 $8,062 $16,367

25 $3,386 $13,585 $32,919

30 $4,322 $22,892 $66,212

35 $5,516 $38,575 $133,176

40 $7,040 $65,001 $267,864

45 $8,985 $109,530 $538,769

50 $11,467 $184,565 $1,083,657

In 50 years, $1,000 becomes $1 million.The point of this table is just to show you: the more you invest, the more money you're likely to end up with.

Here's what happens when you invest money regularly. If you start with an initial investment of $100 and add $100 every year, and your little bundle of wealth grows at 11% per year, here's how much you'll have after various periods of time.

Year Amount

5 $639

10 $1,700

15 $3,488

20 $6,500

25 $11,576

30 $20,129

35 $34,541

40 $58,827

45 $99,749

50 $168,706

Notice in the table above how much you put in, versus how much you have. For example, by Year 5, you invested a total of $500, but you have $639. By Year 15, you invested a total of $1,500, and you have more than twice that. By Year 35, you invested a total of $3,500, and you have almost 10 times that much! Compare this table with the earlier table showing you how a single $100 grows over time at 11%, and you'll see some interesting things. One number that pops out is $6,500. That's how much you'll have after 40 years, if you invest just one $100 bill. But if you're plunking down $100 each year, you'll reach $6,500 in just 20 years -- half as long. See the power of investing regularly? Even with these very small amounts, it makes a huge difference.As you might guess, if you want to know how this would work if you invested $1,000 each year instead of $100, just multiply the numbers in the table above by 10.

If you ever begin to doubt whether all this investing stuff is for you, remember these things:.

You can take a small amount of money and make it a bigger amount in just a few years.Try experimenting with compounding. You can do it the old-fashioned way, with paper and pencil, or the less old-fashioned way, with a calculator. Or fire up the Fool's snazzy online calculators (use the Retirement/Saving one). You just plug in some numbers and it'll show you how much money you'll end up with. Try changing the numbers you enter and see what happens.