Skip to main content

Ready Saver One - A Compound Interest Story

Image
By


Let's play a game. We'll match up the strategies of two savers to see who ends up better off at retirement.

In the blue corner you have Saver 1 -Shirley
In the red corner you have Saver 2 - Nate

Both graduated from university at the age of 21 and launched right into their careers. Shirley a Software Developer for a food delivery app and Nate a Sales Manager for a subscription razor service.

Fast forward 4 years and both have steadily climbed the corporate ladder - getting raises and promotions along the way. Throughout the years, both paid off their student loans with a Jocko Willink level of discipline and are officially debt-free. Both are now 25 and find themselves with money leftover at the end of the month.

Shirley decides to start investing, putting away $500 a month. She does this consistently for 10 years and stops at 35. She leaves her investments alone until retirement.

Nate on the contrary, uses the extra money to upgrade his lifestyle. He moves into a bigger place, buys a new car and subscribes to Netflix, Hulu and Disney Plus. His spending leaves him at zero every month. 10 years pass and a more mature Nate realizes he needs to start saving for retirement. He cuts his expenses and begins investing $500 a month. He does this for 30 years until he retires.

Recap

Shirley invested $500 a month for 10 years (Total: $60K)
Nate invested $500 a month for 30 years (Total: $180K)

Nate invested $120K more and invested for 20 additional years.

Winner

With an annual return of 7% and all else being equal, Shirley's investment would be worth $702K and Nate's investment would be worth only $610K.

Shirley comes out on top by $92K!

How?

Simple. Shirley was early. Nate was late.

Shirley had the power of compound interest on her side. Compound interest is interest that is applied on the principal AND all of the accumulated interest of previous periods. Interest on interest!

Compounding creates a snowball effect for your investments. The taller the hill, the bigger the snowball - the longer the timeline, the bigger the growth.

Despite Nate's total investment amount being 3X of Shirley's, starting late proved to be an insurmountable disadvantage.

At 35, Shirley investment's was already worth $86K, while Nate was starting at $0. Nate doesn't reach $86K until he turns 45, by then Shirley's investment's had already grown to $173K. Nate was stuck constantly playing catch up.

Conclusion

Time is your friend. The earlier you invest, the more you can leverage the power of compound interest. If you haven't started investing, it's never too late.

"The best time to plant a tree was 20 years ago. The second best time is now." - Chinese Proverb

 The same goes for investing.

Labels:

Comments

Post a Comment

Popular posts from this blog

Today's Special: Humble Pie

By
You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark.  Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...
Post a Comment
Read more

When Perfect Becomes a Problem: The iCar Story

By
Let's talk about Apple's iCar, or rather, the ghost of it. A decade. Ten billion dollars. Poof. Gone. Like a puff of smoke from a dream that never quite woke up. They wanted to launch a revolution, a fully-formed, flawless chariot. But revolutions aren't born in secret labs; they're forged in the messy, chaotic crucible of the real world. You don't build a movement by hiding in the shadows. You don't create a product people love by ignoring them. You don't change the world by waiting for perfection. It's about the minimum viable. It's about shipping early, shipping often, and listening—really listening—to the people you're trying to serve. Apple built a cathedral of secrecy. A monument to what might have been. And then, they tore it down.  They spent billions on a dream, while ignoring the simple truth: the market doesn't care about your dreams. It cares about solutions. It cares about things that work. So, here's the lesson: stop chasing...
Post a Comment
Read more

Why We Shouldn't Be Afraid of Ambiguity

By
Ambiguity. That fuzzy monster that chases us down darkened hallways, whispering doubts about our roadmap and feature sets. You know the feeling. You constantly wrestle with unknowns: Will users like this? Is this the right direction? Frankly, if you had a nickel for every time the answer wasn't crystal clear, well, you might actually want to chase that ambiguity down the hall. But here's the thing: ambiguity isn't your enemy. It's your dance partner. Innovation rarely happens in a land of perfect clarity. Sure, there's a time for well-defined processes. But when you're creating something new, there are bound to be more questions than answers. The key is to learn to waltz with the unknown .  Embrace the experiment. Don't be afraid to throw some spaghetti at the wall and see what sticks.  Focus on outcomes, not outputs. Don't get hung up on features. What problem are you trying to solve? How will you measure success? Get comfortable with "go...
Post a Comment
Read more