Compound Interest: It will take 6,932 years to double your money
Compound interest can work wonders for you. That's if you can generate some sort of return on your money. And there lies the rub these days. You're just not getting much return on your money these days.
With the New Year upon us, I thought I'd spend time talking about some of the more important issues we're facing now, when it comes to our money. I've been putting a lot of thought into this and I'm looking forward to sharing those thoughts in the coming weeks.
The first thought that struck me over the holidays is a simple one: save and invest safely. Isn't that something we should all do? In fact, if you can save some reasonable percentage of your earnings, you've taken the first and most important step to building wealth.
Once you do that, you should invest safely. Isn't that just common sense? Why would you save, a form of delayed gratification, only to blow your wad on some risky, unsafe investment scheme? You want to invest that hard-earned money that you saved safely, right?
There's nothing more sure or safe than compounding your money over time. To use a simple example of the power of compounding, just take a 19 year old who puts $2,000 in an IRA for only 7 years. He earns 10%. After 7 years he stops contributing. But letting the money compound at 10% (e.g., 7% interest, plus 3% growth), he'll have almost $1 million at age 65.
Of course, this is a simplistic example that assumes a hefty growth rate (10%), paying no taxes, and doesn't address what $1 million might be worth after 46 years. But you get the point about compounding, I hope.
In a perfect world (or maybe the better term is a sane world), you'd be able to earn some reasonable return on your money in fairly safe investments and just reinvest those earning those earnings over time until you wound up with some pot of money that would help you live decently after you decide to retire. Even if you keep on working, you probably want some money stashed away either for a rainy day, or just to be able to enjoy life while you're not working.
So how do you set up a good compounding program with your hard-earned savings? A good compounding program is built on a steady return of interest and dividends from a relatively safe, secure source. Some safe, secure investments in the past included certain bonds, dividend paying stocks of large, established companies like IBM or Johnson and Johnson and, of course, CD's and money markets.
Have you checked the return on these lately? Most money market accounts return a meager 0.01% now.
Looks like we're hitting a brick wall right off the bat here. At that rate of return, it takes 6,932 years to double your money. That's not really going to inspire you to save, is it?
Your other choice, of course, is to take more "risk" with your money so you get a better return. The problem with that, though, is that the more risk you take, the more likely you are to lose some or all of your money. That doesn't sound like a reasonable or even a sane investment program to me.
So 2010 presents us with it's first significant hurdle: how to get some reasonably safe return on our money so that we can kick-start that compound interest process we know will build wealth for us. Unless you've got some idea how to save and invest safely and compound your money, you'll probably wind up just spinning your wheels - or worse - in 2010.
Unfortunately, I don't have any great suggestions here. But I've always found that if you stick to basics and don't let yourself get sucked into taking risks that make no sense or that could even wipe you out, you'll find a way over time to make progress. Maybe think of it as a football game where its pouring rain, and the field's in terrible shape. The team that makes the fewest mistakes and can move the ball slowly but surely down the field and score a few points will win. They live to fight another day. Chances are the next game will be played under better conditions.
That's what we may have to look for this year: a way to make the fewest possible mistakes and score a few points. While the weather's bad, we just want to come out in the plus column. And getting little or no return on safe investments is just about the best definition of bad weather in the investment world as I can think of.
I know, there's no quick, easy, get-rich stuff in all this. So be it. Besides, things changes. Nothing stays the same in investing - just like in life!
With the New Year upon us, I thought I'd spend time talking about some of the more important issues we're facing now, when it comes to our money. I've been putting a lot of thought into this and I'm looking forward to sharing those thoughts in the coming weeks.
The first thought that struck me over the holidays is a simple one: save and invest safely. Isn't that something we should all do? In fact, if you can save some reasonable percentage of your earnings, you've taken the first and most important step to building wealth.
Once you do that, you should invest safely. Isn't that just common sense? Why would you save, a form of delayed gratification, only to blow your wad on some risky, unsafe investment scheme? You want to invest that hard-earned money that you saved safely, right?
There's nothing more sure or safe than compounding your money over time. To use a simple example of the power of compounding, just take a 19 year old who puts $2,000 in an IRA for only 7 years. He earns 10%. After 7 years he stops contributing. But letting the money compound at 10% (e.g., 7% interest, plus 3% growth), he'll have almost $1 million at age 65.
Of course, this is a simplistic example that assumes a hefty growth rate (10%), paying no taxes, and doesn't address what $1 million might be worth after 46 years. But you get the point about compounding, I hope.
In a perfect world (or maybe the better term is a sane world), you'd be able to earn some reasonable return on your money in fairly safe investments and just reinvest those earning those earnings over time until you wound up with some pot of money that would help you live decently after you decide to retire. Even if you keep on working, you probably want some money stashed away either for a rainy day, or just to be able to enjoy life while you're not working.
So how do you set up a good compounding program with your hard-earned savings? A good compounding program is built on a steady return of interest and dividends from a relatively safe, secure source. Some safe, secure investments in the past included certain bonds, dividend paying stocks of large, established companies like IBM or Johnson and Johnson and, of course, CD's and money markets.
Have you checked the return on these lately? Most money market accounts return a meager 0.01% now.
Looks like we're hitting a brick wall right off the bat here. At that rate of return, it takes 6,932 years to double your money. That's not really going to inspire you to save, is it?
Your other choice, of course, is to take more "risk" with your money so you get a better return. The problem with that, though, is that the more risk you take, the more likely you are to lose some or all of your money. That doesn't sound like a reasonable or even a sane investment program to me.
So 2010 presents us with it's first significant hurdle: how to get some reasonably safe return on our money so that we can kick-start that compound interest process we know will build wealth for us. Unless you've got some idea how to save and invest safely and compound your money, you'll probably wind up just spinning your wheels - or worse - in 2010.
Unfortunately, I don't have any great suggestions here. But I've always found that if you stick to basics and don't let yourself get sucked into taking risks that make no sense or that could even wipe you out, you'll find a way over time to make progress. Maybe think of it as a football game where its pouring rain, and the field's in terrible shape. The team that makes the fewest mistakes and can move the ball slowly but surely down the field and score a few points will win. They live to fight another day. Chances are the next game will be played under better conditions.
That's what we may have to look for this year: a way to make the fewest possible mistakes and score a few points. While the weather's bad, we just want to come out in the plus column. And getting little or no return on safe investments is just about the best definition of bad weather in the investment world as I can think of.
I know, there's no quick, easy, get-rich stuff in all this. So be it. Besides, things changes. Nothing stays the same in investing - just like in life!
Comments