Tuesday, 10 December 2013

Pay for Retirement with a Cup of Coffee and an Egg McMuffin

Pay for Retirement with a Cup of Coffee and an Egg McMuffin
$3 a Day Can Add Up to a Serious Nest Egg

By Joshua Kennon

How many times have you swung by McDonalds on your way to work for a cup of coffee and an Egg McMuffin? It may seem like small change, but the $3 a day it is costing you to buy your breakfast can fund your retirement. Don't believe it? Let's take a look at the numbers.

The stock market has historically averaged a return of around twelve percent. If you began investing $3 a day at twenty five years old and earned the same rate of return, by the day you reached sixty-five, you would have saved a total of $381,437 before taxes. That's a pretty substantial nest egg by anyone's standards. The results are even more spectacular if you start younger (a sixteen year old would save $789,896 pretax by retirement).

Why such the drastic difference between the 16 and the 25 year old? Compounding. When you invest or save, your money earns more money in the form of interest or dividends. If you reinvest these, you earn interest on your interest. Here's how it works: You put $100 in a savings account that earns 4% annually. At the end of the first year, you earn $4 in interest. Let's say you keep that $4 in the savings account. At the end of the second year, you would earn 4% on the $104 (instead of the original $100). This would result in your interest payments higher each subsequent year as you kept reinvesting your interest.

For those of you who are thinking, "Well, I'm 30, 40, 50, or 60+ years old. What can I do?", don't worry! No matter when you start, if you are diligent and intelligent in your investing, you will end up with more money than you would have had otherwise. A fifty year old could still put aside more than $36,013 by following the three-dollar-a-day plan.

The next time you bite into that sausage egg and cheese breakfast sandwich, keep in mind you may be eating your retirement.


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