The Power of Compounding Interest
Compounding interest is one of the most powerful tools in personal finance. The longer your money grows, the more exponential the results. Let's compare three scenarios: doing nothing, saving in a bank, and investing in a broad ETF.
Scenario 1: Doing Nothing
Saving $1,000/month under the mattress gives you just your deposits:
- 5 years → $60,000
- 10 years → $120,000
- 15 years → $180,000
- 20 years → $240,000
- 25 years → $300,000
Scenario 2: Bank Savings (3% Annual Interest)
Low-risk bank savings earn interest, but growth is modest:
- 5 years → $63,900
- 10 years → $143,800
- 15 years → $239,800
- 20 years → $356,700
- 25 years → $496,000
Scenario 3: Investing in ETF (10% Annual Return)
Investing in a diversified ETF (like VFV) with 10% annual return shows the power of compounding:
- 5 years → $77,245
- 10 years → $200,963
- 15 years → $388,992
- 20 years → $660,995
- 25 years → $1,041,034
Comparison Table ($1,000/$2,000/$3,000 per month)
| Monthly Deposit | 5 Years (Nothing / Savings / ETF) | 10 Years | 15 Years | 20 Years | 25 Years |
|---|---|---|---|---|---|
| $1,000 | $60,000 / $63,900 / $77,245 | $120,000 / $143,800 / $200,963 | $180,000 / $239,800 / $388,992 | $240,000 / $356,700 / $660,995 | $300,000 / $496,000 / $1,041,034 |
| $2,000 | $120,000 / $127,800 / $154,490 | $240,000 / $287,600 / $401,926 | $360,000 / $479,600 / $777,984 | $480,000 / $713,400 / $1,321,991 | $600,000 / $992,000 / $2,082,068 |
| $3,000 | $180,000 / $191,700 / $231,735 | $360,000 / $431,400 / $602,889 | $540,000 / $719,400 / $1,166,976 | $720,000 / $1,070,100 / $1,982,986 | $900,000 / $1,488,000 / $3,123,102 |