Have you heard of Albert Einstein?
He was a pretty smart guy.
What do you think one of the smartest people that ever lived had to say about compound interest?
Compound interest is the greatest mathematical discovery of all time.
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
Those are some powerful words from an undisputed genius.
I am so smrt. I am so smrt. I mean s-m-a-r-t.
I thought I was a pretty smart when I was 20 years old. In fact, I thought I was smarter than my college professor Dr. Muchado. One day when we were talking he was giving me some advice for when I graduated.
Save 10% of what you earn when you graduate.
I will never forget my response:
Ha! Why would I save 10% when I’m 20. I’ll just save 20% when I’m 40.
If you’re young and brilliant like I was and know that you’re smarter than your parents and everyone older than you, please hear me on this:
I was not smarter than Dr. Muchado. I was dead wrong. I wasn’t wrong by a little either. I was as wrong as calling the moon the sun.
Was I smarter than Einstein?
I can’t go back and fix dumb me. Money moron me. It’s too late.
I’ve done well, but I’m not flying in a G3 airplane (yet).
Why was Dr. Muchado right? Why was Einstein right? Why was I so wrong?
Because they both know something I didn’t:
What is compound interest?
Compound interest can be described as “interest on interest”. A simple example will explain it:
If you put $100 in a savings account that earns 2% interest a year, at the end of one year, you would have $102.
In the next year, you’ll be earning interest on $102.
Now that is a simplified example. To see why Einstein loved compound interest so much let’s use some slightly bigger numbers and compare Dumb Me to Smart Me.
Dumb Me vs. Smart Me
I found an online calculator that let me plug in some numbers to see if I was smarter than Dr. Muchado and Einstein.
Spoiler Alert: I wasn’t
Dumb Me told Dr. Muchado I would save 20% of my income starting at age 40 instead of 10% at age 20. I blew off his suggestion of saving 10% when I graduated from college.
- Starts saving $5,000 a year at age 40.
- Adds another $5,000 a year until age 65. (25 years of contributions)
- Invests a total of $125,000
Through the power of compound interest the amount Dumb Me would have at age 65 is: $572,066
In this scenario, I would have invested twice as much each year and for an additional 15 years.
Smart Me would have listened to older and wiser people, despite me knowing far more than they did (of course!).
- Starts saving $2,500 a year at age 20.
- Adds another $2,500 a year until age 30 (10 years of contributions)
- Invests a total of $25,000
Through the power of compound interest the amount Smart Me would have at age 65 is: $1,612,622
Smart Me would have $1.6 million at retirement while Dumb Me would have $575k.Smart Me invested $25k while Dumb Me invested $125k.
Why youth is king
When you start investing as soon as you have your first job you can invest less money for less time and have more at retirement.
But wait! Half-a-mil isn’t so dumb!
I know what you’re thinking.
Wow, I can get started at 40 and have $572,066 for retirement! Boom! That’s awesome.
$572,066 for retirement would be great if people would do it. Based on the averages – they can’t.
If it were so easy to start saving $5,000 a year starting at age 40 and keep at it until you were 65, you’re probably thinking like I used to.
Which is why it’s so much easier to start young. While you are single/renting an apartment/driving a cheap car – saving $2,500 a year for 10 years is a lot easier.
And through the power of compound interest you’ll have way more money.
It’s much easier than starting at 40 and setting aside $5,000 a year for 25 years when you have a big mortgage/kids in college/multiple cars.
But I’m not retiring for decades!
Yes, I totally get that as a teenager, twenty-year-old, thirty-year-old – retirement is soooooo looooooong awaaaaaaaaay.
It’s way more fun to spend money now and have a good time when you’re young. That’s why I laughed at Dr. Muchado.
What you do with your money is up to you. I’m just a guy who’s been where you are, and I’m waving my hands up and down at you to give you some solid advice.
I wasted a lot of years before I finally listened to someone smarter than me and did what they told me to do.
Try it for yourself
Want to try out the compound interest calculator for yourself? I used a free online compound interest calculator that allows you to compare two investment scenarios at the same time.
What older people wish for
Ask any adult the following question and you will get the same answer 100% of the time. I guarantee it.
Do you wish you had started saving money when you were younger?
The answer will always be yes.
Just like the answer to another question you can ask anyone older than you:
Do you wish you knew then what you know now?
The answer will always be yes.
Take advantage of the time you have and get started investing today.
You can start earning compound interest tomorrow. Have fun while you’re young and live a rich retirement.
Question: Have you started investing for your retirement yet? Please leave a comment below.