Melanie and James were twins. As soon as Melanie finished school, she went to work and stayed living with her parents. Without many expenses, Melanie was advised to start investing her money. She started investing $1000 per annum and as she was young and had no plans yet for her future , she invested in a low risk investment returning 5% per annum. When Melanie turned 31, she got married and stopped working. She also stopped contributing to her investment portfolio but left it as is.

James on another hand, didn’t start investing until he was age 32. And following in his sisters footsteps, he decided to invest $1,000 per annum in exactly the same investment, providing 5% per annum return.

When they turned 65, they decided to compare how much they had both accumulated in their investments. To their surprise, Melanie had $24,367 more in her portfolio than James.

Was it magic? No.

It was due to compound interest.

Compound interest is interest paid on the initial principal (amount invested) as well as the accumulated interest on money you have invested. Compound interest is like double chocolate topping for your savings. You basically earn interest on interest.

Because Melanie started saving when she was younger, the power of compounding kicked into action much sooner than it did for James.

It’s never too late to start saving, but the sooner the better.