The Power of Compund Interest

 We've all heard about this... right?   When we were kids, a math teacher .. parent.. some adult with a brain, would explain it.  Save a few bucks, and the interest on it compounds.  Add it to it often, and it compounds even more/quicker.  Problem is... most don't really follow through.  I didn't.  I got off to a good start in my early twenties, but soon got side tracked.  Then cashed out and spent it. I did invest in a few Mutual Funds / IRA Accounts... but... stopped contributing and they sat there.   I still have them, but they are 'piddly' in the big picture. Me personally, it wasn't until I got out of the military and truly starting contributing to my 401k that things took off.   Actually I spent most of my time with our ESPP, which was awesome for the five years I was at an OEM.   I'd contribute for 6 months, then they issued us the stock at 15% less than market value on a given day.  I cashed out every six months.   When my stock options were vested, I cashed out. Lets just say .. I was in the money so to speak. Paid cash for a Vette.  Paid cash for a Lexus SUV.  Then ...  taxes.  F' me that hurt that year.  Lesson learned in there somewhere!  I haven't done the math but guessing if I'd left that all in there as long as possible... well.. it'd be a shit load of money. Still, I finally starting pushing funds to my 401k where it'd get mauled in 2008.  Since that time, I've gone hard core with my current company's 401k and as much as possible into a Traditional IRA. Point being, I'm making up for lost time.   Had I done this right, 40+ years ago, I could have been leveraging the power of compound interest.  Can't imagine what my financial state would be now had I done that.   But, maybe someone reading this can learn from my mistakes.   Doesn't take that much on a monthly basis to invest and let it grow and grow over the years.  Put it in there and 'forget about it'!   Add to it often and .. 'forget about it!' ...   

Few examples that bring this message home... this first one I read the other day and got me to thinking about his all over again.  

Enjoy!

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"I’m retired, but I substitute teach [high school] a couple days a week. I’ve started incorporating into my opening schtick something I picked up from The Money Guy. I write the number $63.81 on the board. It goes something like this...

Is $63.81 a lot of money? [talk about it briefly] Let’s say you had a part time job worked maybe 12-15 hrs a week. Would this be a lot of money. I get general consensus of no.

Let’s say you just turned 16 [sophomores] and got your first job. McDonalds, Food Lion, Target, whatever.

If you put away $63.81 each month into a Roth IRA [talk about what that is] and put it in a total stock market index fund an made 10%/yr [talk a little about that]...well within the realm of reason, how much money would you have at age 65 when you want to retire? [take some guesses] You would have One Million Dollars!

And I let that sink in. Ever seen these numbers before? Wow, anyone want to try?

Compound interest can either make you rich, like this example or it can keep you po’ with credit card debt. Your choice."

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 A mentally slow boy about 15 came to a speaker during his presentation on success and said "Mr. Tracy, I live in a group home... I save $100 every month from my work there and I invest it in the market. Will I become a success too?" The speaker had to think fast... as the room was packed full and listening. The speaker had just read some compound interest tables and found that $100/month - saved over a lifetime, of 50 years invested at the historic return on the market (9%) would be worth $1M! The speaker was able to confidently say "Yes, you will be a financial success." (Brian Tracy)

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Thanks for the mention of

ChooseFI. Someone posted this link:

 

 

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Example #1

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The power of compound interest! A 20 year old investing $200 every month for 45 years at average 8% interest would become a millionaire with only $108,000 invested over a lifetime. That same example but waiting until age 30 to invest the same $200 per month would bring them $461,385 over 35 years with $84,000 invested. Please don't be discouraged if you are not 20. You just need to invest more but starting is the most important step.

Compound Interest Calculator (Daily, Monthly, Yearly Compounding) (thecalculatorsite.com)