Tuesday, June 19, 2007

The 8th Wonder of the World

...is compound interest. Not Maria Sharapova.  She's as high as 9th on some of the lists I've seen.

I thought it worthy to share the secret to becoming get rich:  Saving.

That's it.  Don't spill the beans!  If just you and I know, we'll be the only ones!

Interesting refresher by the Motley Fools.  It's something we already know, but doesn't hurt to remind us.  It also makes me feel sorry for the kids coming out of high school without this simple and amazing truth.  They are turned loose to the financial companies who are anxious to load the kids up with credit cards, mortgages, and car payments.  If we could teach kids personal finance in school, maybe it'd help them down the road as they buy homes, have families, save for their kids' college, and plan for retirement.

It also makes me realize the opportunity at hand regarding "private accounts" for Social Security.  I know those are fightin' words for the politically opinionated among us.  But the simple truth is that funding an account month after month, year after year, would produce some pretty dramatic results over a  lifetime.

Let's see how a $3,000 investment will grow over time at the market's historic average annual rate of 10%. (That average, of course, could move higher or lower over time.)

  • Year 1: $3,000
  • Year 2: $3,300
  • Year 10: $7,074
  • Year 15: $11,392
  • Year 20: $18,348
  • Year 25: $29,549
  • Year 30: $47,589

That's just one $3000 investment.  Imagine socking away the maximums in the retirement vehicles offered, like a 401(k) and Roth IRA, year after year.  This is also just 30 years.  If you started at 18, you'd have 50 years to compound before you turned 68.  Thank goodness for spreadsheets.  Lets look:

  • Year 35:  $76,642
  • Year 40:  $123,433
  • Year 45:  $198,791
  • Year 50:  $320,154

The Fools conclude: 

So get yourself in gear. It really is important to start investing, and to do so in earnest beginning in your early years.

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