The Power of Compounding

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8 comments — written on April 10th, 2005

Some dumb things I have heard recently:

“I don’t have any money right now…I’ll invest money later”
“I’m not even thinking about retirement”
” ” (no opinion of investing at all, the worst possible situation)

I’ve written about making your money earn money for you before. The key to being rich isn’t picking the most sophisticated, tax-sheltered investment or doing fancy real-estate deals. The easiest way to get rich is to start early–even with little amounts of money. Check out the 20-second simulation with pretty pictures (from Vanguard). Click to play:

8 comments

Leave your own

1

November 28, 2006
Jonathan

Amen.
2

December 31, 2006
Edwin

Wow, great graph, Its pretty incredible, but true.
3

February 3, 2007
AHFXStudios

The whole trick is that you have to get that 8% interest rate.

If you only get 6.25% then Dave makes more (although he did have to put 40,000 more into the account to do it.

The bad thing is that most people starting out don’t put their money in higher yield accounts, they just put it in a savings account and are not much better off than if they had hid it under their mattress.
4

February 18, 2008
Brandi Jo Newman

What about the taxes you need to pay? When you have compound interest you also have compound taxes? Don’t people usually earn more in their later years and pay more taxes? AND, when you continue to add money to the compounding pile, you are also adding to your tax liability. If there is a tangible need for an interest bearing vehicle, take the growth off the top and do something else with it – pay off debt, life insurance, more cash flow.
5

February 25, 2008
Dexter Stinson

Hello Everyone

I believe strongly in compound interest savings account. I’m haveing trouble finding a compound savings account that will give a 10% rate of return. Please e-mail with help. Thanks Dexter
6

May 22, 2008
Denny

Well, it never said anything about putting in a savings account, it says “investing”. And many investment instruments can earn 8% p.a. easily.
7

May 22, 2008
Barbara Saunders

I agree for the most part, but my financial advisor makes another good point. The key is not “start early”, it’s “start now.” If you are early, lucky you. If you are not early, there’s nothing you can do about it and are wasting your time crying over spilled milk. So, start now!
8

May 25, 2008
Moneybagzz

The presentation illustrates a point but it commits what I call “The Fallacy of a Straight Line Assumption.”
Specifically, equity and bond returns are rarely (looking forward) going to be a straight 8% (or any other amount). It is dangerous to presume that future returns will be like past returns.
In hindsight fluctuations over time may be roughly equivalent to one particular rate; but you can’t depend on that as a steep drop in asset values can severely reduce your returns.
I have a preference for ‘opportunistic allocation.’ I prefer to buy shares on days when the market is in the tank, rather than on a fixed day of every month. Should I choose to sell, I do so gradually (and hopefully in a general uptrend).
I would bet that a person who makes purchases on days that the market stumbles would outperform a person who dollar-cost-averages (but I have no data to back that up).