lecture today and I heard an interesting story about compound interest, that honestly scared the crap out of me!I am going to attempt to retell the story, but using my own names and numbers.
Fred got a job at the age of 20. He decided to save $25 per week (the equivalent of two packs of smokes, five pints at the pub, a DVD, a trip to the movies or a week worth of deli lunches, or whatever other crap we spend our money on). He saved this $25 religiously for 10 years. By his 30th birthday, he had amassed $22,304 worth of saving at 10% (for illustrative purposes); $13,000 had come out of his own pocket, and he'd earned $9,304 in interest. He keeps this up for another 5 years and then decides that having hit $45,178 in saving, he decides his saved enough and wants to spend the next 30 years of his career living it up like his twin brother Bob did in his 20s.
Meanwhile his twin brother Bob had spent the first 10 years of his career pissing his money up against the wall. After 10 years of living paycheque to paycheque; by age 30, he doesn't a cent to his name. He found out that his brother Fred had already saved $22,304 and thought; bugger, I should probably start saving some money. Determined to play catchup with his brother and to try and beat him at the savings game, he decides to save twice as much as his brother; $50 dollars a week.
At a retirement age of 65, Bob has spent the last 35 years of his career saving $50 per week; which has been, $91,000 out of his pocket, but he's managed to accumulate a total of $832,112 at 10%. Bob's convinced he'd beat his brother because he had been saving twice as much, even more so when he found out that Fred stopped saving when he hit 35!
As we had discussed, Fred didn't save a single dollar after 35. He had accumulated $45,178 by the age of 35, and it had cost him $19,500 by saving $25 for 15 years during his 20s and early 30s. He left this $45,178 in the bank to collect interest. Infact he'd actually forgotten about it, until he got a call on his 65th birthday from the bank, asking if he would like to start drawing an income from the $904,813 he had saved during his career!
You can see, the Bob was quite a determined saver in the end. He had saved $91,000 of his own money. Fred had been an intelligent saving in the beginning. He had only saved $19,500 of his own money, but because he stared 10 years earlier his money already had momentum.
Most people think about their retirement when it's too late to save for it. If I had have been told this story in high school, I would have started saving at 16, not at 23. I am just grateful that I figured it out when I did.
Anyway, some food for thought. Until next time;
Chris Hooper
(Innovate or Die)