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Plan Well, Retire Well

Saving and investing your money

The Magic of Saving Money

Saving money can be magical. Start small, contribute regularly, and through compounding returns amazing things happen! Compounding returns is a fancy way of saying that money in savings and investment accounts earns MORE money for you – it works for you. In a savings account, you earn interest. In an investment account you earn returns such as dividends, interest, and growth in value. These returns (real dollars) exist – not from your salary – but because you have money working for you.

Let's look at an example: imagine that you put $100 in an account with a return of 5% each year. At the end of the first year you'd have $105: $100 of your deposit and $5 return. You don't add money to this account; instead, you just let your money grow.

At the end of the second year, you'd have $110.25: $100 original deposit, $5 return from year one plus $5.25 return from year two. Notice that the return is higher the second year. This is because you've now earned return on the return from year one – this is huge over time.

How does that work if we use a long-term example? If a twenty-five year old deposits $5000 in an investment account (like a Roth IRA) and then lets this money earn compounding returns for 40 years (no money is withdrawn) until retirement, how much money would they have? If the $5000 earned 9% or better returns, over $150,000 would be in the account in 40 years. That's the magic of compounding returns!

Let time and compounding returns work for you. Start saving and investing now.

To set a savings goal, go to America Saves -- you can take part in the magic of saving too!

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