“Compound interest is the eighth natural wonder of the world and the most powerful thing I have ever encountered.” — Albert Einstein
Luck-tales, wo-ooo!
Check out this crazy math: Your generous Uncle Scrooge McDuck puts $10,000 into an index fund (because history shows those grow at an average of 10% per year) for your favorite child on the day he is born. No one ever adds another penny, but your son leaves the money alone until the day he turns 70 (you must’ve raised him right). That $10,000 has now grown into $10,653,859.*
Whoa.
Now, let’s say you want to have $10,653,859 when you turn 70, too. Are you turning 35 this year? Oh, good… If you want to have the same 8-digit net worth on your 70th birthday, I hope you have $326,418 saved by the time you blow out your 35 candles.
Want to start at another age?
| 0 years old | $10,000 |
| 7 years old | $20,081 |
| 14 years old | $40,321 |
| 21 years old | $80,962 |
| 28 years old | $162,565 |
| 35 years old | $326,418 |
| 42 years old | $655,422 |
| 49 years old | $1,316,036 |
| 56 years old | $2,642,494 |
| 63 years old | $5,305,917 |
| 70 years old | $10,653,859 |
* There are things to factor in, like taxes, inflation, etc. — but more on those another day.
Credit Card Captivity
Another thought: the above is showing growth at 10% — what about a $10,000 credit card balance that grows at 27% per year? You would have to pay $225 per month forever just to keep the balance from increasing (and that assumes you are not using the card to make additional purchases).
Most credit card companies require you to pay the greater of $X or 1% of the new balance. Assuming you are not adding to the balance, at $10,000, 1% is $100 — not even enough to cover interest! Sounds like some pretty scary math.
Applied Math
So, what are you to do with this information?
Am I telling you to set aside money for your kids’ retirement? Maybe. Am I warning you of the dangers of credit card debt? Meh, I’m betting you already know that on some level.
These numbers are mostly intended to underscore the astonishing power of compound interest and how it can work for or against you — big time.
Thoughts to Think
- Do you only pay the minimums on your credit card(s) each month?
- Are you putting off contributing toward your retirement so that you can fund life now?
- Are you paying extra toward your low interest rate mortgage?
- Did you choose a 15-year mortgage instead of a 30-year mortgage?
- Did you pay cash for your vehicle in lieu of a low interest loan?
Some of these you do out of necessity — your lifestyle, as you currently live it, does not leave room for other decisions. Others, it’s a psychological decision — you feel better getting rid of a payment sooner rather than having one more thing to track.
But what are these decisions costing you? And what can/should you do instead, if anything? More thoughts, advice, and math to come – sign up below to get notice of future posts.
networth•y 