INVESTOR PLUS

ompounding is earning "interest on interest," where your original savings generates a return that creates more money. Staying invested and contributing regularly can significantly increase your assets over time as your savings grow and the effect accelerates—a powerful force in a long-term savings strategy.

Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price, explains the concept this way: "Imagine you have a barren field—and one day sow some plants. Each of them will generate seeds that then grow into new plants, which will also start generating seeds. Over time, assuming a positive rate of growth, your field will become more rapidly covered in plants from the new seeds instead of from your original planting."

STARTING TO SAVE NOW
The sooner you begin to invest, the more you can benefit from compounding. Even if you start with small contributions, your savings will begin to potentially generate returns that will seed your nest egg. Waiting could have consequences—if unexpected events, such as a medical emergency or an unplanned period of unemployment, force you to interrupt or reduce your savings plan, you'll have to increase your contributions to an even higher rate. "The longer you wait to start," Ritter says, "the more money you will have to save once you begin in order to achieve to the same goal."

STARTING SMALLGROWING BIG
Consistently saving over time can add up to a significant nest egg.
A young adult who will retire in 40 years makes an initial contribution of $1,000 into a Roth IRA and adds $100 a month. After four decades of saving, she had more than $250,000—all tax-free. Starting Small—Growing Big

Assumes a hypothetical average annual return of 7%. This chart is shown for illustrative purposes only and does not represent the performance of any specific security.

Click here for more on Roth IRAs.

INVESTING AUTOMATICALLY
As an investor, your ultimate goal is to grow your balance to the extent needed to reach your objectives. One path to increasing value is to implement an automatic investing strategy, whereby you invest at regularly scheduled intervals. Automatic investing helps to prevent lapses in your investment plan due to events such as short-term market developments or personal circumstances. Of course, automatic investing cannot assure a profit. Since such a plan involves continuous investment regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of both high and low price levels.

Click here for more on systematic investing.

PASSING ON YOUR INVESTING KNOWLEDGE
One important step you can take is to talk to your children about money early in their lives. Impress upon them how valuable and advantageous it is to start investing while they're young. They'll be more likely to reach their most important financial goal—having enough saved for a comfortable retirement many decades in their future. A Roth IRA may be the best savings vehicle to help them because qualified withdrawals after a lifetime of saving and investing will be tax-free. Says Ritter, "Getting a young person started with just $100 from each paycheck will provide a significant jump-start on potential compounded savings growth."

Single video player: Transparent Backgroundplayer sized for widescreen videos and standard TRP 525pixel width

Teach Your Children
About Saving

Judith Ward, CFP®, a senior financial planner with T. Rowe Price, sat down with her son, Justin, a recent college graduate in his early 20s. Her goal: convince him to open and contribute to a Roth IRA so that he gets a strong financial start in life.

1 An early start to saving may help you afford future college costs.
2 Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price, explains that the amount you save toward retirement can have a dramatic impact on your retirement.
3 Don Peters, portfolio manager of the
T. Rowe Price Tax-Efficient Equity
Fund, discusses his strategies to minimize capital gains and maximize after-tax returns.
4 A Diversified Blend of Growth and Value.
5 Depending on the plan you choose, you and your employees can enjoy tax-advantaged savings, plus a broad range of investment choices.
6 Saving for college can help you meet the costs of higher education. And don’t overlook the important contribution grandparents can make.
7 T. Rowe Price FuturePathSM helps you see the impact of key decisions as you approach retirement.
8College Savings Plan receives Morningstar's highest rating; T. Rowe Price outperforms; Connections explores big trends.
9Powerful and innovative technology is set to become a bigger part of our lives—including robotics, genomic advances, and seamless device connectivity.
10The new tax laws exempt millions of middle-class taxpayers from the AMT. What steps can help you manage and minimize your exposure to the tax?
11How the fundamental benefits of creating an estate plan far outweigh the challenges of setting one up.
11A clear understanding of your portfolio's exposure to risk may allow you to maintain an appropriate long-term strategy.
11Compounding can generate wealth.