On Compound Interest - Part 2+2=5

There is wisdom in thrift.
There is wisdom in frugality.
There is wisdom in parsimony.

If your goal is to increase your net worth, anyway.

Benjamin Franklin agrees:

• "A penny saved is a penny earned."
  
  AND
  

• "If you would be wealthy, think of saving as well as getting."

These ideas are especially true if you aspire to accumulate wealth and if you, like me, are an employee not an owner. A laborer, not a master. Those of you who have been following along here may object given that you know I am a "lawyer." But the fact remains: I get paid for MY work. I get paid by the widget (piece of legal work product), if you look at it one way, or by the hour (time spent working through legal problems of client), if you look at it another way. I don't get paid because of profits of the business resulting from the toiling of my colleagues. (The owners reap that benefit.)

So money that flows to me from my work does not experience compounding. There's no leverage. There's only so many hours in the day. There's only so many "widgets" one lawyer can make. Even if he can type over 90 w.p.m. with 97 to 98 percent accuracy.

Say you decided not to buy that fancier television for five more years, saving yourself a cool $1000 in crisp hard currency. And say then you invested that $500 for twenty years in investments returning a compounded five percent (5%), ten percent (10%), fifteen percent (15%), and just for fun, if you followed the advice in this book and history repeated itself, thirty percent (30%).

Here's how much you'd have at the end of those twenty years (i.e., here's how much that puny little $1000 scrimped and saved over that five year period turned into through the magic of compounding):

• at 5% - $20,012.92.
• at 10% - $38,228.75.
• at 15% - $75,271.60.
• at 30% - $599,657.19.

So buy that book and save that $500. And compound those returns. And buy a yacht.

(Note the same math applies to things like late fees for rented movies. The younger you are, of course, the more time you have to compound, assuming you achieve the average life expectancy. Oh, and don't smoke. For example, three dollars compounded at 30% for 40 years is $78,363,730.35. Is it really worth almost $80 million to you, the hassle of taking back movies to the rental place on time?)

Photo Credits: here