The Power Of Compound Interest… The Terrible, Terrible Power
November 5th, 2012 by Aaron Koo
Most of us know what compound interest is. And no matter how many times we see a graph that illustrates that, it’s always pretty astounding. All you have to do is look at one of my Money Monday posts to see what I mean. The thing is that it is also really distressing to think about it in the opposite way.
Don’t Find Yourself Treading Water
Let’s turn that around for a second. You’re sitting in BC Place Stadium at the top level, handcuffed to a seat. By the time you notice that the ground is covered with a knee high level of water, you’d essentially be left with 5 minutes to call for help. Of course no one would care if the ground was a bit damp. You’d have a quick look and go back to looking at the handcuffs trying to shake yourself out of them. You’d have five minutes to pull your phone out and call someone for help. Would even 10 minutes do?
What’s Money Got To Do With It?
If you don’t start saving money for retirement today or tomorrow, the amount you need to save also compounds. Let’s say you want $7 million saved (approx $60,000/month in today’s dollars) by the time you’re 65 years old. Let’s look at how much money you’d need to put away based on the number of years you have to save.
- 40 years: $2041/month
- 35 years: $3083/month
- 30 years: $4750/month
- 25 years: $7416/month
- 20 years: $11916/month
- 15 years: $20250/month
- 10 years: $38166/month
- 1 year: $583333/month
This graph illustrates the data above. The amount is SO exponential that you can’t even see the amount in the beginning.
This is a second graph which only shows the first 20 years.
Start Saving NOW
I can’t spell it out any clearer on how ridiculously difficult it is to save when you put it off. You can tell yourself that you’ll save when you make more money, only to find that the amount you need to save has now gotten higher. And it’s not savings, per se. It’s at least knowing what your plan will be. Maybe you’re biding your time while you build a business as a part of a retirement plan. Maybe you’re sitting on a huge inheritance. Either way, wake up and smell the retirement people. It’s coming quicker than you think!
Tags: inflation, money management, retirement
Filed under Money.
The problem is you need the money to put into savings. In today’s economy having anything left is very hard. I put $60 a month into my 401k and that is more than I really can.
Nowadays is more difficult than never to left money…I believe that we should maximaze the efforts when the things goes well
It’s not the action of savings that so much the issue as the length of time it takes to make drastic decisions about it. I became an entrepreneur because I didn’t want to work a Mon-Fri 9-5 salary because I knew I’d be in the rat race. A good friend of mine had the same thoughts. He’s 50 now and 5 years ago decided to become a lawyer. He didn’t like his circumstances and made a decision. If you feel in trouble, there no time like the present to act. If you prefer your current situation, then make it as secure as possible. But holding off on what you really want creates a compounding effect that disables you from achieving that.
I agree with you Aaron!
I’ve own a little “forgotten” reserve of money and I’m trying to keep them growing everyday.
The inflation is my first enemy!
That’s awesome! Keep it up
You are doing a great job.
Thank you Edwin. I’m glad you enjoy my posts. Is there anything in particular you’d like me to post about?
You’d think putting money away for cpp would help growth but all I see is the market regulating whether it was a good year or not. No mater how much I put in.
Especially for people our age, we should not rely on CPP. Those funds are getting depleted way faster than they are getting replenished. I think Aaron would agree.
We’re not going to have a CPP. That’s a topic I’m planning to cover and that is the birth of the socialized retirement plan and it’s unsustainable folly.It was a bad idea then and it’s a bad idea now