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All these don’t come from nothing

 

Ben Carlson has just written another fantastic post on how compound interest works wonders even for very marginal increases in rates of return. His post was based on a quip made by Paul Merriman during a podcast with Med Faber about how a difference of just 0.5% makes a huge difference over longer periods of time.

You can check out some numbers he ran that shows what a 0.5% difference in rates of return can make over a long period of time. The point I want to make, which Ben kind of does as well, is how compounding does not help if there isn’t anything to compound in the first place.

$10,000 compounded at 6% over 30 years ends up becoming $57,434.91. To make things simple, let’s call it $57,500. To someone 30 years ago, $10,000 would have been a huge sum of money but if that’s all they had set aside for when they stopped working, they would be in serious trouble today.

Similarly, today if you are a working adult in your late 20s to early 30s, and if you think $100,000 is an impossibly huge sum to save in order to start compounding with, you might be in for a shock when you reach 60 years of age.

I’m not saying that $100,000 is a walk in the park to obtain. However, young adults who think that $100,000 is an impossibly huge sum to save up are NEVER going to reach that amount. That’s simply because of the huge mental block that comes with thinking that you’re never going to be able to achieve. It’s the same with anything else in life right? If you thought that you were never going to lose weight, then why would you even try? Or even if you “tried”, it would be that sort of half-assed attempt and you would give up at the first encounter of difficulty. But, seriously, it’s not so bad. This is how you can get started.

Of course, actually changing your habits so that you hit your goals takes a monumental effort. Personally, I find it easier to hit those goals if you have some sort of epiphany or paradigm shift about the problem. I’ll talk more about that in my next post.

 

 

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