The Power of Compound Interest (and Why Time Is Your Best Friend)
Your 20s and 30s are full of exciting moments—launching a career, paying off student loans, buying a first home. With so much happening, it’s easy to think of retirement as something to worry about later. But there’s one secret to long-term wealth that makes starting early one of the smartest moves you can make: compound interest.
Compound interest is the concept of earning interest on your interest. Over time, your money doesn’t just grow—it grows faster and faster. That’s because each year, the interest you’ve already earned starts earning interest, too. It’s like a snowball rolling downhill, picking up more momentum the longer it rolls.
To understand just how powerful this is, imagine two investors in this hypothetical scenario. One starts investing $200 a month at age 25. The other waits until age 35 to begin, contributing the same amount. Both continue investing until they’re 65. Assuming an average 7% annual return, the person who started at 25 ends up with more than $500,000. The one who waited until 35? Just under $250,000. That 10-year head start made all the difference—even though they both invested the same amount every month.
This is why time is your most valuable asset. Many people worry about ‘timing the market’ or the ‘right time’ to invest. But the truth is, consistent investing over time is more important than perfect timing. Trying to time the market or waiting until you feel completely ready often leads to missed opportunities. History shows that time in the market and staying invested allows compound interest to do it’s part.
If you’re just getting started and feel unsure, that’s okay. You don’t need a large sum to begin or advanced knowledge to take action. One of the easiest ways to get started is by setting up automated contributions – whether through your 401(k), an IRA, or a brokerage account. This is known as a “set it and forget it” approach: once it’s in motion, your money starts working for you behind the scenes. If your employer offers a 401(k) match, take full advantage. That’s essentially free money compounding on your behalf. Even small, consistent contributions can build your wealth over time, especially when they are automated. The key is starting early, staying consistent, and letting time and discipline do the heavy lifting.
The best time to invest was yesterday. The second-best time is today. And the longer you wait, the harder it becomes to catch up. So whether you’re just starting your career or simply haven’t taken that first step yet, now is the perfect time to put your money to work. Need help figuring out where to begin? Schedule a free consultation or email us at info@shermanwealth.com to learn more!