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Investing Basics

April 2014: Save Early, Save Often: The Power of Compounding

Albert Einstein is often attributed with saying compound interest is the eighth wonder of the world. Compounding occurs in savings accounts when both contributions and previous earnings (e.g., interest, dividends, etc.) generate more earnings. Over time, compounding is the driving force behind the growth of your nest egg. This is why it is very important to start saving for long-term goals such as retirement or education as early as possible.

An example… Samantha and Jason are each 25 years old. Samantha begins investing $4,000 per year in an IRA and does so for 15 years. At this point, she stops contributing but leaves the balance in her IRA. Her total contributions to the IRA equal $60,000. Jason waits 15 years and then, at age 40, begins investing $4,000 per year and continues to do so until he retires at the age of 65. Over the 25 year period, his contributions total $100,000.

If Samantha and Jason earn 6%* on their investments, who has the larger retirement nest egg at age 65? You may be surprised to find that even though Jason saved $40,000 more than Samantha, her retirement nest egg at age 65 would be about $399,590 compared to Jason’s balance of $219,458.

Age Samantha's Balance Jason's Balance
25 $4,000 $0
30 $22,548 $0
35 $52,723 $0
40 $93,104 $4,000
45 $124,594 $22,548
50 $166,735 $52,723
55 $223,129 $93,104
60 298,597 $147,142
65 $399,590 $219,458

How is this possible? Simple: the power of compounding. Because Samantha started saving when she was just 25, her account benefited from compounded earnings to such a degree that Jason’s account couldn’t catch up, despite his additional 10 years of annual savings.

Conclusion: save early, save often. You can’t generate earnings if you aren’t saving anything. Make your long-term goals (especially retirement) a priority and let the power of compounding work for you.

The Credit Union’s Pre-Retirement Financial Assessment can help you determine if you are currently saving enough to meet your retirement goals. Visit any SECU branch to have an employee help you complete the Pre-Retirement Financial Assessment or, if you prefer, you can access the assessment through secure Member Access by clicking the Financial Assessment link under the Services tab at

*The hypothetical rate of return is for illustrative purposes only and is not intended to portray actual results. The actual rate of return will vary over time.

Investment advisory services offered to North Carolina residents through Credit Union Investment Services. Securities offered through SECU Brokerage Services. Member FINRA, SIPC. Securities products are not credit union deposits. They are not obligations of or guaranteed by a credit union or its affiliates. They are not insured by the NCUA or any federal government agency. Securities products involve investment risks, including possible loss of principal. Investment representatives are also credit union employees, who may accept deposits.

Previous Investing Basics:

  • March 2014: Contributing to traditional and Roth IRAs can be great; however, you may need to make changes to your contributions.
  • February 2014: Take advantage of some IRA tax benefits.
  • December 2013: Are you paying the price for investment expenses?
  • November 2013: Saving for retirement in an individual retirement account (IRA) or other retirement account prepares you for a better financial future.
  • October 2013: For members seeking income that is exempt from federal income taxes, CUIS has expanded recommended municipal bond funds.
  • May 2013: Too Much Cash?
*Quoted rates, dividends, annual percentage yields (APY) and rates (APR) are subject to change daily at the discretion of the Board of Directors.