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.

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.

Comments

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. 

ELI5: The Stock Market

Today we get back to basics and answer some of the most common questions about the stock market.

Step One is Knowing

In school, we listen to our teachers. At home, our parents. Throughout our childhood, following instructions is praised and rewarded. When we're young, there's value in this. We don't understand how the world works quite yet, so guidance can be lifesaving.  The bias to just accept obviously has drawbacks. Insert old jumping off a bridge adage .  This conditioning is especially strong for kids from lower income households. Their parents are more likely in working class jobs involving strict order-taking. Parents of middle-class households tend to be knowledge workers where influence is essential.  Studies have shown kids from middle-income households are more willing to negotiable with their teachers. They learn from their parents that things are not set in stone. This leads to better grades and learning outcomes when compared to their lower income counterparts who don't negotiable.  In business, if we simply accept things as they are, we would never innovate. In work, w