Skip to main content

Ready Saver One - A Compound Interest Story

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.


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.


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!


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.


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.


Popular posts from this blog

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event.  Be specific. Give clear examples. Vague feedback equals dismissed feedback.  Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes. 

Bias For Clarity

Bias for action. Gets things done. Go-getter. Traits companies big and small look for. And for good reason, you're being hired to do things! However, action is a secondary step that often overshadows the primary step, direction.   Clear direction is the foundation that enables our actions to takeoff. Without it, we're stuck in the mud.  Striving for clarity is an underrated skill. Having the courage to ask ( seemingly ) obvious questions, and to check in, making sure we're all on the same page. "O bvious " questions are a low risk, high reward way to add value. At worst, you'll add confidence to our actions. At best, you discover a misalignment that saves us from a dead-end.  The more people, the more clear we need to be. The bigger the initiative, the bigger the risk of reaching the finish line, only to realize expectations were off.  Success is always uncertain. But we can be certain about what we want and what everyone's job is. Things that can be clea

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study  invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer.  Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong.  "You're right!" feels good. We savour the moment, analyzing every detail.  "You're wrong!" stings. We want to quickly forget, dismiss, and move on.  When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie