Compound interest is a powerful financial tool that allows your money to grow exponentially over time.
In his book “MONEY: Master the Game,” Tony Robbins emphasizes this concept with a compelling story about twin brothers, William and James, who have drastically different investment approaches.
- William, the forward-thinking brother, started investing $4,000 annually in a retirement account at the young age of 20. He diligently contributed for 20 years, stopping at age 40. Even though he stopped adding funds, he left the accumulated money in the account to grow at a 10% annual rate.
- James, on the other hand, lived a more carefree life, choosing not to prioritize saving and investing in his younger years. When he turned 40, he realized the importance of securing his financial future and started contributing $4,000 annually to a similar retirement account, also with a 10% annual growth rate. He continued making these contributions diligently until his retirement at age 65.
One might assume that James, having contributed three times longer than William, would have a significantly larger nest egg at retirement.
However, the power of compounding tells a different story. Despite James’s extended contribution period, William ends up with a substantially larger retirement fund, over twice the size of James’s.
This remarkable difference highlights the importance of starting early and harnessing the power of compound interest over time.
Robbins emphasizes that this story, originally shared by economist Burton Malkiel, illustrates how even small, consistent investments made early in life can lead to significant wealth accumulation over time through the power of compound interest.
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