4 ms·

If you can learn the power of compound interest at your age, you're going to retire very comfortably.

• csomar 16y ago
  I read some of the Wikipedia article about it. However, the bank won't give you 20% yearly, yet barely enough to cover the inflation. Nor the stock market and real estate do, so I wonder how compound interest would help and in any way?
  • nlco 16y ago
    It would manifest itself if you invest in your own company.
  • heresy 16y ago
    Sorry, let me clarify. Let's say you started investing/saving at the age of 18 up until 65, and lets say the amount you put in per month over that period of time was $800 per month - this is pretty low, given how much your income should increase over time. At a conservative rate of return of 5%, at age 65, it would be worth around $1.8 million, $1.35 million of that being the compound 5%, and only roughly $450,000 being what you put in. Essentially, the earlier you start saving, the bigger your runway, and the more comfortable you'll be later in life, without having to compromise on your lifestyle right there and then. The later you start, the more you have to put in each month to get the same outcome at the end. Something I wish my parents had taught me :) Of course, if you start your own business, and are successful enough, the numbers look way, way, better. This is essentially just your fallback position.
    • carbocation 16y ago
      5% is not a particularly conservative rate of return.
      • zackattack 16y ago
        Hasnt the stock market historically grown at a 10% annual rate
        • mschaecher 16y ago
          Factor inflation and taxes.
        • carbocation 16y ago
          Yes, I agree (~8% over the very long run I think). But it's not timescale invariant. Look at what it's done over the past 10 years, for example (-1%). I'm not trying to say that the stock market doesn't grow over time. I'm just trying to say that if the mean annual growth is truly 8%, it has a really high variance. Thus, there are some things that I wouldn't count on (say, the ability to arbitrage from a 3%-interest loan into straight profit, for example) which I might try to do if the return was consistently 5%. I suppose that for me, when I think conservative, I think consistent.
          • chipsy 16y ago
            The 8% claim is misleading and possibly harmful. Nobody wants returns to be that "lumpy" - down for 10 years! Who could stand it? All investments have a certain lifespan on them - with things like bonds and T-bills, interest payments and maturity are fixed and contractually obligated, while with equities it's up to company performance. To really do well, you have to think like a trader and run all investments over a specific timeframe with predetermined exit signals for profit, loss, or trend changes. It may look as if Warren Buffett lets money sit in the market. But he is actually running trades over decades of time. He has to - he literally has too much money to make useful(percentage-wise) profit in smaller time frames.
            • carbocation 16y ago
              I agree that the 8% number is, at once, misleading, harmful, and true! True because it is a simple observation, but misleading because people behave as though the future recapitulates the past, of which there is no guarantee. I think that the "misleading and harmful" part is more important--which was the crux of my original comment about the lack of consistency.
  • deleted 16y ago
    [deleted]