THIS BLOG IS MY BLOG. THIS BLOG IS MY BLOG. Welcome to the Home of Hyperopia.: On Compound Interest - Part 2+2=5

Sunday, July 23, 2006

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

12 Comments:

Blogger PDD said...

Interesting you mentioned a fancy TV. We just purchased a $3000.00 50' LCD television for our bedroom. This was my outrageously handsome husbands idea and I really didn't see the need for it. I am far more frugal than my outrageously handsome husband.

The TV comes tuesday. At least if I want to watch something different than what he has on the tube I could go downstairs and watch whatever I want. That's a bonus.

4:55 PM, July 23, 2006  
Blogger garrett said...

I hope that was 3000 canadian.

5:06 PM, July 23, 2006  
Blogger PDD said...

Yes, it was 3000 canadian. But our dollars are almost equal now.

6:46 PM, July 23, 2006  
Blogger PDD said...

Everyone in the film industry complains about it.

6:47 PM, July 23, 2006  
Blogger Truth Girl said...

This is not a helpful post in light of my upcoming nuptials and the costs associated with them.

4:09 PM, July 25, 2006  
Blogger garrett said...

I think that's a matter of perspective. It could be VERY helpful ...

4:15 PM, July 25, 2006  
Blogger garrett said...

Especially if you'd get that Greenblatt book and implement his recommendations.

4:42 PM, July 25, 2006  
Blogger Dongley Shlongford said...

I've had some green blatts before.
I could never figure it out.
Chicks don't really dig it all that much when you toss a green island chain on them.
Penicillin usually gets things running clean and clear again, dude.

11:22 AM, July 28, 2006  
Blogger David Amulet said...

So what you're saying is ... if I don't buy that Venti White Chocolate Mocha and I put the money into an interest-bearing account, in 30 years I can just buy thhe Starbucks chain?

But I'm thirsty NOW, dammit.

Maybe this is why I don't own three houses by now.

1:39 PM, July 31, 2006  
Blogger garrett said...

Even just buying the Tall and investing the difference would make a big difference spread over one year of Starbucks consumption.

You're not THAT thirsty, are you?

7:07 PM, August 01, 2006  
Blogger Complete Game said...

I've been withdrawing lots of cash from the cash machine lately, but with no concrete purpose. If I'm near one, I generally take out $300. I don't claim to be rich; I just feel better when I'm rolling with keesh. I counted what's in my wallet this morning, it was $780 total (I've taken out more lately in preparation for a bachelor party in Chicago this weekend). Other than buying some drinks this weekend, I don't have any great need for that much coin on hand. I just feel the need to withdraw money whenever I'm near an ATM just IN CASE I don't cross paths with another machine soon enough. I assume this violates one of your ding-dong rules?

11:45 AM, August 02, 2006  
Anonymous Hendrik Oude Nijhuis said...

I highly recommend Greenblatt book “The little book that beats the market’. Personally I differentiate from the books ‘advice’ to pick stocks randomly out of the selection. I believe with knowledge of businesses one could select the most promising ones, which will lead to additional returns (this is the way Greenblatt uses the screen himself).

I have written some revealing reports on how to know which stocks to select: www.magicformulastocks.com Also in these reports I give clues on further ways of generating extra return (the reports are for free).

Success in investing,
Hendrik Oude Nijhuis
www.magicformulastocks.com

8:41 AM, January 21, 2007  

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