Compound Interest
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"The most powerful force in the universe is compound interest." – albert einstein
From January 1980 to December 1999 the S&P 500 went from 108 to 1469. This works out to just about a 14% compound annual growth rate (excluding dividends). It was quite a run. Can we duplicate it?
2000 to 2004 haven't gotten us off to a great start but we still have time left. But just so you know, to duplicate that kind of investment environment by the end of 2019 the S&P 500 has to climb to about 20,395.
I've mentioned compounding before but wanted to come at it from a different angle. When planning for the future err on the side of conservatism in your assumptions. Otherwise you are setting youself up for grave disappointment.
Here are some different compound rates to consider. Look at what a little difference in compound rate can do to the bottom line. A 9% return leaves you with less than half of the pile of money earned at 14%, the compound annual rate anybody tracking the broad market received the last 20 years of last century. That's a reality check.
$100,000 compounded annually for 20 years at:
| Annual Rate | Future Value |
|---|---|
| 3% | $180,611.12 |
| 6% | $320,713.55 |
| 9% | $560,441.08 |
| 12% | $964,629.31 |
| 14% | $1,374,348.99 |
| 17% | $2,310,559.92 |
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Great lil tid bit here, been teaching the wonders of compound interest during high school classes for years.
Usually start with what happens if someone gave you 10k when you were born…
I think it’s important to emphasise that Compound Interest depends on so many variables, e.g. the rate of inflation, interest rates, the amount saved and over how long. Unfortunately the answer is never black and white. I teach compound interest to young adults and use this compound interest calculator as a base http://www.inspiredtosave.com . It’s useful as it has a selection of interest and inflation rates and calculates how much interest you earn on one million dollars, based on these variables. However, the downside of the site is that it focusses on long term compound interest – some of the kids find it hard to visualise so far in advance.