Put Time on Your Side With the Power of Compounding

Sometimes people put off saving for retirement because so many other things seem to get in the way. Do you find yourself among them? If so, try to overcome the urge to procrastinate and start saving as soon as possible. When it comes to investing for long-term goals, time can be a powerful ally.

Time and Investment Returns

The reason time can work for you is because of a concept called compounding. The idea behind compounding is simple — when your investment earns money, this amount is reinvested in your account and potentially generates more earnings. Over time, this process can increase the growth potential of your original investment. If your earnings are reinvested for a long enough period, compounding can reduce some of the pressure on you to invest greater amounts as you approach retirement.

The power of reinvested earnings partly explains why some people who start investing early in their careers often end up with more money than people who start later, even if their total contributions are less.

Compounding With Every Paycheck

Your employer-sponsored plan may be one of the most convenient ways to make compounding work for you. Every paycheck, you have a new opportunity to add to your retirement savings. For 2015, you may be able to contribute a maximum of $18,000 (check with your employer, because some organizations may impose lower limits). If you are age 50 or older, you may also have the opportunity to save up to $6,000 more. Even if you cannot afford to invest the maximum amount, try to do as much as you can.

Of course, you can’t benefit from compounding if you don’t stay invested. Withdrawing money during your working years could wipe out or reduce the savings you have accumulated, which would reduce some of the benefit of compounding.

So don’t procrastinate. Start saving as soon as possible and take advantage of what compounding can potentially do for you.

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