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View Full Version : A Possible New Year's Resolution for the 20 Somethings Here


ChicagoJack
12-26-2005, 09:17 AM
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“Most young adults do not save because they perceive that the opportunity cost is too great. However, when they begin to understand the power of compound interest over time, they may decide that the benefits of saving are, in fact, greater than the benefits of spending the money today. Financial success is rarely achieved unless individuals choose to postpone some current spending so that they can save some income. Many young people think they don't have enough income to save and, as a result, they don't get off to an early start on a regular saving program. Young adults who choose to start saving early and regularly to take advantage of the magic of compound interest can build their personal savings into a comfortable nest egg. To illustrate what we are talking about complete the following exercises.” [continued]
http://www.econedlink.org/lessons/index.cfm?lesson=EM570&page=teacher

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Example 1. For those of you that need to take a nap, when folks start talking about money or investing issues, here is a quick visual way to understand the point I am attempting to make, go to this link.
http://www.ayionline.com/tm1/compound.html

Then scroll down to the first two black and white charts marked "Return Vs Time". Notice the difference between 30 years of investing vs. 40 years of investing. The results are dramatic. How much money you contribute to a retirement plan in your 30’s or 40’s, is not as big a factor as starting in your 20’s.

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Example 2. “The magic of compound interest is simply a combination of time and rate of return. Let us begin by taking a truly long-term look at the financial markets. Complete data tracing the returns of financial assets are available beginning in 1872. I use primarily the Standard & Poor's 500 Composite Stock Price Index.” [continued]
--“The Magic of Compounding”
Excerpted from Bogle on Mutual Funds by John C. Bogle, pages 4-5
http://finance.yahoo.com/funds/understanding_investing/article/100532/The_Magic_of_Compounding

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Example 3. Compound interest is one of the simplest and most compelling concepts in mathematics. If you make a £100 investment with a 3% annual return, and reinvest all of the interest earned, then you earn your returns on £103 in the second year, and so on. Interest on interest does not pile up particularly quickly, but the long-term results can be truly dramatic.Imagine that one of your forebears had invested £1, a thousand years ago in 1006. With a 3% annual real return, that £1 would be worth almost £7 trillion today. Seven trillion is 7 with 12 zeros on the end, or £7,000,000,000,000 if you prefer. The total of all the wealth in the world's financial markets today is £35 trillion, so your ancestor's little nest egg would by now have grown to one fifth of all the world's financial wealth. [continued]
--“The magic of compound interest”
Thursday December 15, 2005
The Guardian
http://money.guardian.co.uk/interestrates/story/0,6453,1667777,00.html

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Example 4. “Rule of 72 - Have you always wanted to be able to do compound interest problems in your head? Probably not, but it's a very useful skill to have because it gives you a lightning fast benchmark to determine how good (or not so good) a potential investment is likely to be. The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years.” [continued]
http://www.moneychimp.com/features/rule72.htm
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

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Example 5. “Such is the power of compound interest. Consider another example. Suppose someone had taken Ben Franklin's a penny saved is a penny earned advice two hundred years ago and no one had ever added to that one penny but it had been allowed to grow at 10% interest each year since. What would that one penny investment have grown to today? One million and nine hundred thousand dollars”
http://www.seniorsceneonline.com/articleview.php?article=55

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Bottom line: If you are in your twenties, and you have not started saving for your retirement, I urge you to do it now. One of the great tragedies of the public school system, is generally speaking, handling money is not taught. Most people discover the advantages of starting early, too late to take advantage of it. Go to a bookstore and buy an investing book, subscribe to a money magazine, take a class, do whatever it takes to get started. In my opinion, learning to manage your own money would be a better route than hiring a professional to do it. I’m sure others here would disagree with that premise. When you are young, and new to investing, you might make mistakes due to lack of experience, or knowledge, but the amount of money invested in those mistakes is usually small. Your skill and knowledge can grow as your money grows.

Offering unsolicited advice is dangerous business, especially in the arena of investing, and I expect to take a little heat for this one. The stock market is not a magic money making machine. Investments must must be chosen wisely. How to invest in is not my central issue here, that would be an inappropriate conversation, in my opinion. I'm simply urging young adults to get in the game. I'm simply motivated to help young people understand the basic concept of compound interest while they are still young enough to take advantage of it.

Best Regards, Seasons Greetings to all
-Jack

Newberry
12-26-2005, 01:04 PM
I wish I had this kind of advice about 15 years ago.... kind of depressing for a 34 YO to read!
You "younguns" should pay careful attention to this. Almost everyone I know lives paycheck to paycheck. Its a disturbing trend. I wish I had spent a little less on toys in my 20's and a put a little more in the mattress.

Call me a Scrooge, but if we all put money in a savings account for our kids at birthdays, Easter, Christmas, etc... they'd have a solid saving foundation... instead of a closet full of junk.

Thanks for the post!

GRANITECHIEF
01-03-2006, 11:22 AM
Solid advice Chicago Jack. I too wish i had been introduced to more financial concepts at an early age. Everyone should read "Rich Dad, Poor Dad" and attempt to get out of the rat race. I am trying to get to a point where passive income exceeds my expenses. Trying to earn all this active income (job) really cuts into my many avenues of fun.

Can you believe some savings accounts are paying 4% compared to most at 0.5%. A few keystrokes can incease the return by nearly 800%, almost a ten bagger.

Geezer Guy
01-03-2006, 12:02 PM
I agree. Great advice.