10 ms·

Understanding compound interest thoroughly. Compound interest is probably the most powerful "force" governing out lives. It is crucial when borrowing money, e

Understanding compound interest thoroughly. Compound interest is probably the most powerful "force" governing out lives. It is crucial when borrowing money, especially for longer terms. It is crucial when saving and investing. It is crucial in self-development, where a tiny 5% improvement in some area of your life per year can mean that you are twice as good at something in 15 years. It is important when evaluating any kinds of improvements in personal life or in business. The trick is that the percentage never sounds like much. The number of years always sounds like a lot. Nonetheless, the years WILL pass whether you want them to or not, and what tiny life choices you make throughout have a huge impact on where you will be in the future. Being aware of that does not take much. An hour of intense concentration should be enough to get this insight. Of course, this depends on your age and math background. However, I feel confident saying the above as this to the Hacker News audience, as the above requires nothing more than an imagination and the ability to add and multiply by decimals.

majortennis 7y ago
compound interest is where the bank say's its 3.5% interest but if you do the math you're paying 180% for a house. I don't have any idea how that became acceptable/the norm.
- epanchin 7y ago
  You need to adjust for inflation.
  - majortennis 7y ago
    inflations a big scam too, stop printing bloody money
    - bildung 7y ago
      The printing of US dollars in the last decade had zero effect on inflation. https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
      - nopassrecover 7y ago
        But what about wealth distribution?
      - PeterStuer 7y ago
        That is because of how the QE was executed, pouring money directly into the financial markets with negligible impact on the real economy. In the markets where the money did end up, like the stocks and bonds markets, inflation ran rampant with NASDAQ and S&P history shows.
        bildung 7y ago
        That isn't inflation. Inflation is about consumables. If the valuation of assets rise, that is actually the opposite: If you sell the asset, the returns can buy you more consumables. And neither S&P nor NASDAQ had anything resembling rampant gains, BTW: S&P: https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re... NASDAQ: https://www.macrotrends.net/1320/nasdaq-historical-chart https://www.macrotrends.net/1320/nasdaq-historical-chart (you have to click on the "by year" tab). In neither of these charts a person unaware of QE could identify a trend.
        PeterStuer 7y ago
        In the last ten years the NASDAQ index went from 2.000 to 8.500 and the S&P500 from 1.000 to over 3.000 in what is generally referred to as the "10 year rally". Inflation as in the rise in price of a basket of goods is generally used in reference to the consumer price index, but can also be used in reference to stocks, and baskets of those such as the indices.
        bildung 7y ago
        And before S&P went from 400 to 7000 largely uninterrupted, and NASDAQ from 350 to 7100. But as those are compounding values (i.e. there is not a linear realationship between year n and year n+1, but an exponential one) one can gain more insights from comparisons of the annual returns - that is the reason why I linked those. The annual returns are not unusual, though. Please have a look at them! If the prices of assets rise, that is appreciation. If stocks or houses appreciate, you can sell them and profit: Your purchasing power rises. If consumables experience inflation, you can not sell them for a profit: They are either immaterial, like services, or can rot, like food. This isn't pedantry, these are different concepts.
    - AnIdiotOnTheNet 7y ago
      How do you discourage hoarding and encourage spending and investment, thus keeping your economy flowing, without inflation?
- koolba 7y ago
  This is a good example why one should understand compound interest. Through in a payment schedule and amortization as well. The bank is giving you $X to buy the house. You’re paying off a piece of it each month (your mortgage payment). Part of that goes to the interest on the loan, the rest goes to principal. The interest each month is based upon on the remaining principal. That means your payment starts off being mostly interest and gradually becomes mostly paying off principal. You could say, “But I can just save the full price and then buy the house with no interest!”. Sure you could. But you’re forgetting that you’re living in the house (or renting it out...) while you’re paying it off.
  - majortennis 7y ago
    Just seems like a massive scam thats become the norm. You're paying off interest on the first month, as if you've already had the money for 20 years. They take liberties from day one.
    - cko 7y ago
      You do already have the money for 20 years - that’s what the lender “pays” for you on day one.
    - cthor 7y ago
      Just as well, you get to start acting like you own the house from day 1.
      - greyhair 7y ago
        That is wonderful phrasing on the idea. Thank you.
    - ubercow13 7y ago
      Why should there be no charge for borrrowing the money for 20 years? That doesn’t make sense, you have had the money for 1 month when you make the first payment, and so you are charged for it.
    - imtringued 7y ago
- PeterStuer 7y ago
  I have many reservations and am very critical of the financial system. But the concept of interest on loans is not a "scam'. The interest in it's simplest form is just a value appreciation of the time value of money [1]. Would you rather have $100 today, or $100 next month? How about $100 today vs $102 next month? Still rather in the today camp? How about $105 next month? That is the interest. It is the value derivative of having the money 'now' vs having the money 'later'. Where things can get scammy is in the complex type of credit products on offer (tying in all sorts of opaque references to things presented as neutral which are far from), and how things are communicated to the borrower. Tip: If you are considering a loan, always ask for a full repayment plan showing you which payments are due each month, and the resulting reduction in the amount due (your payment first covers the interest accrued in that month, and only after that covers principal reduction). If there are variables in the loans formula, ask for simulations that cover the most likely evolution scenario, as well as the extremes. Every financial institution has such a payment plan calculator. Long ago I have written one which afaik is still in use today in a non-trivial financial services company. [1] https://www.investopedia.com/terms/t/timevalueofmoney.asp https://www.investopedia.com/terms/t/timevalueofmoney.asp
  - javajosh 7y ago
    Good comment. I sometimes describe borrowing as renting money, where interest is the rent. Its a mathematically interesting construct because, for one thing, the value of the thing you rented goes down with cumulative rent paid. It's kind of a degenerate money cycle if you loan money to someone who uses it to pay you interest on the loan. I suppose only taxes (serving as friction, removing energy) prevent this from being a kind of economic perpetual motion machine! I'd be stunned if this trick wasn't a) very old, and b) have about 1000 modern variations.
  - majortennis 7y ago
    I didn't say interest on a loan was a scam I think compound interest on mortgages is. A fixed price interest would make sense like you borrow £100 , you pay back £110. 10% interest. But my understanding on a compound interest mortgage is the bank says something like 2% interest. and they take the £100 and x by 1.02 and just spam ='s on the calculator until the actual interest percentage is like 180%. You shouldn't have to spend an hour learning how the bank are gnna screw you.
- throwaway744678 7y ago
  Depending on your country, the law may require the bank to actually print the total cost of the loan on the contract as well. You'd have a better argument with revolving credits, the rates of which are generally much more predatory.
- 6gvONxR4sf7o 7y ago
  If you lend me $X at 3.5%/yr for 30 years and I can earn 7%/yr elsewhere, like by investing in a S&P index tracker. Say there's no minimum payment on your loan, just to keep the math easy. In 30 years, I'm going to owe you 2.8 * X (via 1.035^30). My investment of that $X loan has grown into 7.6 * X (via 1.07^30). After tax, call it 6.5 * X. After I pay you off, I've earned about 3.7 * X. If the initial loan was $400k on a $500k house, then yeah it sucks that I've payed you $1.1M, a clear overpayment, but I wont be sad because I'm coming out ahead by about $1.5M. In reality, loans come with minimum payments, so you can't come out quite so far ahead. What this all means is if you can do something better with your money, (e.g. market tracker at 7% on a 3.5% loan), then just pay the minimum and do that better thing with the rest. If you can't (e.g. market tracker at 7% on an 8% loan), then pay it down as fast as you can, or don't take it in the first place unless there are other factors.
tlight 7y ago
The 'rule of 72' is a quick and easy rule of thumb to determine how long an investment doubles, and improve how you think about compound interest. For example it takes approx. 10 years to double an investment at 7%, or 7 years at 10%.
- tzebby49 7y ago
  We are currently in a world where it is very difficult to find interest rates >2%. I found a tezos staking pool at approximately 5% recently.
  - cecilpl2 7y ago
    The S&P500 with dividends reinvested has averaged a real (post-inflation) return of 7% annually over the last 100 years or so. It's currently up 24% YTD.
    - tzebby49 7y ago
      Noted.
    - Crashbat 7y ago
      That's fine if you are prepared to take on significant risk - it took six years for the index to recover after the 2007 financial crash. If anyone was looking to retire on their investment then they'd be screwed. At least with a bank your savings are guaranteed.
      - oakesm9 7y ago
        That's why you take on riskier investments early on and transition to "safer" ones as you reach retirement age (or whenever you're planning to access the money).
        derivagral 7y ago
        I always found this slightly wrong (for a non-outlier case). If you're young and you have some earning/saving power, why would you want that to be risky? Keeping it "safe" in an index fund means that it is compounding longer than the assets you'll get later in life!
palerdot 7y ago
There is this nice book called "The Slight Edge" which builds on this whole idea in general and how it is applicable at every facet of life. It is really an insightful book and atleast you will slightly change about how you think about stuffs.
- criddell 7y ago
  I'm reading *Atomic Habits right now and the author talks about how building small improvements on top of each other can eventually deliver great gains. The trick seems to be identifying just what it is to work on.
  - palerdot 7y ago
    Added to my reading list! Thanks for the suggestion.
morgan65 7y ago
I was referred online by eric albert to hire Benati Jordan after checking him out it was obvious he's totally legit and a professional. i made over $600,000 with Bitcoin He helped me generate funds by hacking and multiplying my Bitcoins. All Thanks to him and his team. He's the best bitcoin miner out there based on a personal experience with him. His email is "jordancorporation01@gmail.com".
ryanschneider 7y ago
I think a seriously overlooked application of this principle is in nutrition and dieting. Over- or under- eating by a small percentage of your required intake might not have a discernible effect immediately but really adds up over time, both for weight loss and gain.
- jmmcd 7y ago
  But that's not compounding in the sense of compound interest.
  - loco5niner 7y ago
    Sure it is, if you think about how much harder it is to run at 225 pounds vs at 200 pounds.
    - jmmcd 7y ago
      Yeah, it's easier to run, but nah, because diminishing returns.
- collyw 7y ago
  I am pretty sure that only applies to certain people. I stay fairly skinny no matter what, though I do move about a lot.
  - greyhair 7y ago
    How old are you? My father was thin until he turned 27. He was never huge, but at 27 he was 170lbs (6'2") and at his peak, around age 65, he was a little over 200. He warned me about that. At 27, I was also 170 lbs (6'2") (I am nearly a clone of my dad), and then slowly gained weight. I briefly ballooned to 215 around age 31, but hammered that back down to 185, but since then it has slowly climbed to 200 (at age 60). I am back down to 196. In my early twenties I could eat a large 'special' pizza by myself in about 45 minutes. Metabolism changes with age. I dearly miss being able to eat anything I wanted at any time with no consequences.
muzani 7y ago
Compound anything is powerful. Interest is... really slow these days though. Seems to be around 3% return after inflation. And with all the countries taking really high national debt, who's to say it will get better? The whole compound concept applies very well to startups though. 3% a week adds up.
- joshspankit 7y ago
  3% is the high-end of the “consumer” (aka “chump”) interest rates. In fact, since inflation is about 3%, over time your money doesn’t grow. (Though, if you’re earning less than inflation your money is actually decreasing in value, so maintaining is better than that)
  - loco5niner 7y ago
    I got a 2.9% rate for my car loan and a 3.625 for my house. both pretty close to 3. Are my banks chumps?
- cecilpl2 7y ago
  The S&P500 with dividends reinvested has averaged a real (post-inflation) return of 7% annually over the last 100 years or so.
  - jjoonathan 7y ago
    100 years isn't really "these days," though.
    - NightlyDev 7y ago
      Not sure what that is supposed to mean. It's ~9 % the last ~5 years.
      - ac29 7y ago
        But only ~4% over the last 20 [0]. If you cherry pick start and end dates, you can make stock market returns look as good or bad as you'd like. [0] https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1999&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=SPY&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
greyhair 7y ago
Also learn about opportunity cost when spending and saving. It is tied to compound interest in many ways, but also deals with addressing wants vs. needs, and also scoring your wants.
heipei 7y ago
Since really grasping compound interest I've noticed it apply across almost all aspects of life, which is what OP is saying. It shouldn't be reduced to the financial aspect which is probably the better-understood aspect of it. Think about things like your education, your professional skills, your interests and hobbies, your health, your friendship and (professional) social network, hell, even your kids. Whatever little you put into any of these today will compound over time. If I set some time apart today to better learn a programming language (or a text editor) I will be more productive with it over the next few years. If I develop a healthy exercise and nutrition regimen in my youth, I'll have less trouble maintaining that as I get older and a better starting point. If I try to go out and meet people then I'll have a large network of contacts to draw from if I'm ever looking for something specific in the future. If I've dabbled with a number of different hobbies in my youth then I'll have all these experiences which shape, and ultimately improve the outcomes that I have when tackling a problem today. And lastly kids: If I spend quality time with my kids in their very early formative years (reading, singing, talking) then by the time they enter school they will already have an above-average level of education and that difference will continue to compound for them in their life.
- solipsism 7y ago
  The underlying concept that applies to much of life is feedback loops. Compound interest is just one example of a feedback loop.
l3robot 7y ago
It is true. It is crucial to understand any kind of growth situation which are predominent in life. For instance, one of my friends who is a teacher wanted to explain sustainable development to his highschool students by showing the effect of cutting too much trees if this doesn't match the trees growing rate. He asked me to solve the not so trivial equations with a series and found myself returning to the same maths used for the interest computation.
maire 7y ago
The way I look at it is compounding just changes the effective interest rate. Continuous compounding is e^rt. Just subtract straight interest from this and you discover the maximum return of compounding over just collecting interest. Most compounding periods are much less than continuous. I think this would take less than an hour. ;-)
deleted 7y ago
[deleted]

majortennis 7y ago

compound interest is where the bank say's its 3.5% interest but if you do the math you're paying 180% for a house. I don't have any idea how that became acceptable/the norm.

epanchin 7y ago
You need to adjust for inflation.
- majortennis 7y ago
  inflations a big scam too, stop printing bloody money
  - bildung 7y ago
    The printing of US dollars in the last decade had zero effect on inflation. https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
    - nopassrecover 7y ago
      But what about wealth distribution?
    - PeterStuer 7y ago
      That is because of how the QE was executed, pouring money directly into the financial markets with negligible impact on the real economy. In the markets where the money did end up, like the stocks and bonds markets, inflation ran rampant with NASDAQ and S&P history shows.
      - bildung 7y ago
        That isn't inflation. Inflation is about consumables. If the valuation of assets rise, that is actually the opposite: If you sell the asset, the returns can buy you more consumables. And neither S&P nor NASDAQ had anything resembling rampant gains, BTW: S&P: https://www.macrotrends.net/2526/sp-500-historical-annual-returns https://www.macrotrends.net/2526/sp-500-historical-annual-re... NASDAQ: https://www.macrotrends.net/1320/nasdaq-historical-chart https://www.macrotrends.net/1320/nasdaq-historical-chart (you have to click on the "by year" tab). In neither of these charts a person unaware of QE could identify a trend.
        PeterStuer 7y ago
        In the last ten years the NASDAQ index went from 2.000 to 8.500 and the S&P500 from 1.000 to over 3.000 in what is generally referred to as the "10 year rally". Inflation as in the rise in price of a basket of goods is generally used in reference to the consumer price index, but can also be used in reference to stocks, and baskets of those such as the indices.
        bildung 7y ago
        And before S&P went from 400 to 7000 largely uninterrupted, and NASDAQ from 350 to 7100. But as those are compounding values (i.e. there is not a linear realationship between year n and year n+1, but an exponential one) one can gain more insights from comparisons of the annual returns - that is the reason why I linked those. The annual returns are not unusual, though. Please have a look at them! If the prices of assets rise, that is appreciation. If stocks or houses appreciate, you can sell them and profit: Your purchasing power rises. If consumables experience inflation, you can not sell them for a profit: They are either immaterial, like services, or can rot, like food. This isn't pedantry, these are different concepts.
  - AnIdiotOnTheNet 7y ago
    How do you discourage hoarding and encourage spending and investment, thus keeping your economy flowing, without inflation?
koolba 7y ago
This is a good example why one should understand compound interest. Through in a payment schedule and amortization as well. The bank is giving you $X to buy the house. You’re paying off a piece of it each month (your mortgage payment). Part of that goes to the interest on the loan, the rest goes to principal. The interest each month is based upon on the remaining principal. That means your payment starts off being mostly interest and gradually becomes mostly paying off principal. You could say, “But I can just save the full price and then buy the house with no interest!”. Sure you could. But you’re forgetting that you’re living in the house (or renting it out...) while you’re paying it off.
- majortennis 7y ago
  Just seems like a massive scam thats become the norm. You're paying off interest on the first month, as if you've already had the money for 20 years. They take liberties from day one.
  - cko 7y ago
    You do already have the money for 20 years - that’s what the lender “pays” for you on day one.
  - cthor 7y ago
    Just as well, you get to start acting like you own the house from day 1.
    - greyhair 7y ago
      That is wonderful phrasing on the idea. Thank you.
  - ubercow13 7y ago
    Why should there be no charge for borrrowing the money for 20 years? That doesn’t make sense, you have had the money for 1 month when you make the first payment, and so you are charged for it.
  - imtringued 7y ago
PeterStuer 7y ago
I have many reservations and am very critical of the financial system. But the concept of interest on loans is not a "scam'. The interest in it's simplest form is just a value appreciation of the time value of money [1]. Would you rather have $100 today, or $100 next month? How about $100 today vs $102 next month? Still rather in the today camp? How about $105 next month? That is the interest. It is the value derivative of having the money 'now' vs having the money 'later'. Where things can get scammy is in the complex type of credit products on offer (tying in all sorts of opaque references to things presented as neutral which are far from), and how things are communicated to the borrower. Tip: If you are considering a loan, always ask for a full repayment plan showing you which payments are due each month, and the resulting reduction in the amount due (your payment first covers the interest accrued in that month, and only after that covers principal reduction). If there are variables in the loans formula, ask for simulations that cover the most likely evolution scenario, as well as the extremes. Every financial institution has such a payment plan calculator. Long ago I have written one which afaik is still in use today in a non-trivial financial services company. [1] https://www.investopedia.com/terms/t/timevalueofmoney.asp https://www.investopedia.com/terms/t/timevalueofmoney.asp
- javajosh 7y ago
  Good comment. I sometimes describe borrowing as renting money, where interest is the rent. Its a mathematically interesting construct because, for one thing, the value of the thing you rented goes down with cumulative rent paid. It's kind of a degenerate money cycle if you loan money to someone who uses it to pay you interest on the loan. I suppose only taxes (serving as friction, removing energy) prevent this from being a kind of economic perpetual motion machine! I'd be stunned if this trick wasn't a) very old, and b) have about 1000 modern variations.
- majortennis 7y ago
  I didn't say interest on a loan was a scam I think compound interest on mortgages is. A fixed price interest would make sense like you borrow £100 , you pay back £110. 10% interest. But my understanding on a compound interest mortgage is the bank says something like 2% interest. and they take the £100 and x by 1.02 and just spam ='s on the calculator until the actual interest percentage is like 180%. You shouldn't have to spend an hour learning how the bank are gnna screw you.
throwaway744678 7y ago
Depending on your country, the law may require the bank to actually print the total cost of the loan on the contract as well. You'd have a better argument with revolving credits, the rates of which are generally much more predatory.
6gvONxR4sf7o 7y ago
If you lend me $X at 3.5%/yr for 30 years and I can earn 7%/yr elsewhere, like by investing in a S&P index tracker. Say there's no minimum payment on your loan, just to keep the math easy. In 30 years, I'm going to owe you 2.8 * X (via 1.035^30). My investment of that $X loan has grown into 7.6 * X (via 1.07^30). After tax, call it 6.5 * X. After I pay you off, I've earned about 3.7 * X. If the initial loan was $400k on a $500k house, then yeah it sucks that I've payed you $1.1M, a clear overpayment, but I wont be sad because I'm coming out ahead by about $1.5M. In reality, loans come with minimum payments, so you can't come out quite so far ahead. What this all means is if you can do something better with your money, (e.g. market tracker at 7% on a 3.5% loan), then just pay the minimum and do that better thing with the rest. If you can't (e.g. market tracker at 7% on an 8% loan), then pay it down as fast as you can, or don't take it in the first place unless there are other factors.

tlight 7y ago

The 'rule of 72' is a quick and easy rule of thumb to determine how long an investment doubles, and improve how you think about compound interest. For example it takes approx. 10 years to double an investment at 7%, or 7 years at 10%.

tzebby49 7y ago
We are currently in a world where it is very difficult to find interest rates >2%. I found a tezos staking pool at approximately 5% recently.
- cecilpl2 7y ago
  The S&P500 with dividends reinvested has averaged a real (post-inflation) return of 7% annually over the last 100 years or so. It's currently up 24% YTD.
  - tzebby49 7y ago
    Noted.
  - Crashbat 7y ago
    That's fine if you are prepared to take on significant risk - it took six years for the index to recover after the 2007 financial crash. If anyone was looking to retire on their investment then they'd be screwed. At least with a bank your savings are guaranteed.
    - oakesm9 7y ago
      That's why you take on riskier investments early on and transition to "safer" ones as you reach retirement age (or whenever you're planning to access the money).
      - derivagral 7y ago
        I always found this slightly wrong (for a non-outlier case). If you're young and you have some earning/saving power, why would you want that to be risky? Keeping it "safe" in an index fund means that it is compounding longer than the assets you'll get later in life!

palerdot 7y ago

There is this nice book called "The Slight Edge" which builds on this whole idea in general and how it is applicable at every facet of life. It is really an insightful book and atleast you will slightly change about how you think about stuffs.

criddell 7y ago
I'm reading *Atomic Habits right now and the author talks about how building small improvements on top of each other can eventually deliver great gains. The trick seems to be identifying just what it is to work on.
- palerdot 7y ago
  Added to my reading list! Thanks for the suggestion.

morgan65 7y ago

I was referred online by eric albert to hire Benati Jordan after checking him out it was obvious he's totally legit and a professional. i made over $600,000 with Bitcoin He helped me generate funds by hacking and multiplying my Bitcoins. All Thanks to him and his team. He's the best bitcoin miner out there based on a personal experience with him. His email is "jordancorporation01@gmail.com".

ryanschneider 7y ago

I think a seriously overlooked application of this principle is in nutrition and dieting. Over- or under- eating by a small percentage of your required intake might not have a discernible effect immediately but really adds up over time, both for weight loss and gain.

jmmcd 7y ago
But that's not compounding in the sense of compound interest.
- loco5niner 7y ago
  Sure it is, if you think about how much harder it is to run at 225 pounds vs at 200 pounds.
  - jmmcd 7y ago
    Yeah, it's easier to run, but nah, because diminishing returns.
collyw 7y ago
I am pretty sure that only applies to certain people. I stay fairly skinny no matter what, though I do move about a lot.
- greyhair 7y ago
  How old are you? My father was thin until he turned 27. He was never huge, but at 27 he was 170lbs (6'2") and at his peak, around age 65, he was a little over 200. He warned me about that. At 27, I was also 170 lbs (6'2") (I am nearly a clone of my dad), and then slowly gained weight. I briefly ballooned to 215 around age 31, but hammered that back down to 185, but since then it has slowly climbed to 200 (at age 60). I am back down to 196. In my early twenties I could eat a large 'special' pizza by myself in about 45 minutes. Metabolism changes with age. I dearly miss being able to eat anything I wanted at any time with no consequences.

muzani 7y ago

Compound anything is powerful. Interest is... really slow these days though. Seems to be around 3% return after inflation. And with all the countries taking really high national debt, who's to say it will get better? The whole compound concept applies very well to startups though. 3% a week adds up.

joshspankit 7y ago
3% is the high-end of the “consumer” (aka “chump”) interest rates. In fact, since inflation is about 3%, over time your money doesn’t grow. (Though, if you’re earning less than inflation your money is actually decreasing in value, so maintaining is better than that)
- loco5niner 7y ago
  I got a 2.9% rate for my car loan and a 3.625 for my house. both pretty close to 3. Are my banks chumps?
cecilpl2 7y ago
The S&P500 with dividends reinvested has averaged a real (post-inflation) return of 7% annually over the last 100 years or so.
- jjoonathan 7y ago
  100 years isn't really "these days," though.
  - NightlyDev 7y ago
    Not sure what that is supposed to mean. It's ~9 % the last ~5 years.
    - ac29 7y ago
      But only ~4% over the last 20 [0]. If you cherry pick start and end dates, you can make stock market returns look as good or bad as you'd like. [0] https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1999&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=SPY&allocation1_1=100 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

greyhair 7y ago

Also learn about opportunity cost when spending and saving. It is tied to compound interest in many ways, but also deals with addressing wants vs. needs, and also scoring your wants.

heipei 7y ago

Since really grasping compound interest I've noticed it apply across almost all aspects of life, which is what OP is saying. It shouldn't be reduced to the financial aspect which is probably the better-understood aspect of it. Think about things like your education, your professional skills, your interests and hobbies, your health, your friendship and (professional) social network, hell, even your kids. Whatever little you put into any of these today will compound over time. If I set some time apart today to better learn a programming language (or a text editor) I will be more productive with it over the next few years. If I develop a healthy exercise and nutrition regimen in my youth, I'll have less trouble maintaining that as I get older and a better starting point. If I try to go out and meet people then I'll have a large network of contacts to draw from if I'm ever looking for something specific in the future. If I've dabbled with a number of different hobbies in my youth then I'll have all these experiences which shape, and ultimately improve the outcomes that I have when tackling a problem today. And lastly kids: If I spend quality time with my kids in their very early formative years (reading, singing, talking) then by the time they enter school they will already have an above-average level of education and that difference will continue to compound for them in their life.

solipsism 7y ago
The underlying concept that applies to much of life is feedback loops. Compound interest is just one example of a feedback loop.

l3robot 7y ago

It is true. It is crucial to understand any kind of growth situation which are predominent in life. For instance, one of my friends who is a teacher wanted to explain sustainable development to his highschool students by showing the effect of cutting too much trees if this doesn't match the trees growing rate. He asked me to solve the not so trivial equations with a series and found myself returning to the same maths used for the interest computation.

maire 7y ago

The way I look at it is compounding just changes the effective interest rate. Continuous compounding is e^rt. Just subtract straight interest from this and you discover the maximum return of compounding over just collecting interest. Most compounding periods are much less than continuous. I think this would take less than an hour. ;-)

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