"Every 25-Year-Old In America Should See This Chart"

[Dicey]

Of the three examples below, who will end up with the most money at age 65?

Susan, who invests $5,000 per year only from ages 25 to 35 (10 years). $50,000 total investment
Bill, who also invests $5,000 per year, but from ages 35 to 65 (30 years). $150,000 total investment
And Chris, who also invests $5,000 per year, but from ages 25 to 65 (40 years). $200,000 total investment

Do you know the answer to this question?

To find the answer and why, check out the article below. I am no fan of Yahoo Finance, but this may be the best damn thing they have ever published. Yes, it's a shameless plug for some big bank, but it's incredibly valuable information. If every high school student was taught this concept, there would be a lot more happy retirees in the world.

http://finance.yahoo.com/news/every-25-old-america-see-200000319.html

[potm]

Um, seems like a pretty simple question. Should probably be reprashed to who out of Susan and Bill ends up with the most money at age 65 to demonstrate the power of compound interest.
Not making much of a point that the person who saves the most for longest ends up with the most.

[thepokercab]

Unfortunately, the comments on that page are pretty depressing. 

"What 25 year old can save $5,000 a year"? 

"Maybe if I was making 60K a year I could save $5,000!!"

Or:

"What a bunch of MALARKEY. They always forget to factor in that you almost never get the 5-6+% returns" 

/facepalm

[skyrefuge]

Um, seems like a pretty simple question. Should probably be reprashed to who out of Susan and Bill ends up with the most money at age 65 to demonstrate the power of compound interest.
Not making much of a point that the person who saves the most for longest ends up with the most.

Yeah, I agree, that's actually a terrible version of that example (which, in its correct form, I agree with Diane and BI, is a powerful example). Most places I've seen it, it only has "Susan" and "Bill". Adding in "Chris" completely muddies the message.

Here's Vanguard's version: http://www.vanguard.com/compounding

They do include their version of "Chris", but only at the very end, correctly portraying him not as "Chris", but as "Susan, if she had kept investing after 35".

ETA: Vanguard's animation is also pretty terrible; I remember seeing a PDF of this from them a long time ago that was much clearer.

[RapmasterD]

Yeah, whatever people.

I believe the point Diane C was trying to make was about the amazing power of compounding. Of course the person who saves over a 40 versus a 20 year period of time will amass more money. But the differences, due to compounding returns, are pronounced.

I like this example just fine.

BTW, original source for this is Business Insider. They just use Y! as a distribution channel.

LINK: http://www.businessinsider.com/compound-interest-retirement-savings-2014-12

[Chranstronaut]

This argument is pretty common in most retirement information for young people; I've seen it multiple times in every pamphlet or info session for the 401k at work.  But people don't read them or really comprehend it, or simply say, "That's nice, but it doesn't work for me because because because..."

I overheard a radio talk show at work that had a list of ways to become a millionaire for people in their 20s.  My coworker turned it up and told me and another under-30 person to listen up, so we didn't "end up like him."  The list was pretty unrealistic, like selling web apps or building a start-up.  I thanked my coworker and told him I already knew how to save a million dollars by doing exactly what I do now for the next 20 years, and he just laughed. *shrugs* whatever.

[Dicey]

Yeah, whatever people.

I believe the point Diane C was trying to make was about the amazing power of compounding. Of course the person who saves over a 40 versus a 20 year period of time will amass more money. But the differences, due to compounding returns, are pronounced.

I like this example just fine.

BTW, original source for this is Business Insider. They just use Y! as a distribution channel.

LINK: http://www.businessinsider.com/compound-interest-retirement-savings-2014-12

HeHeHe, of course it wasn't original to YF, the quality of the article was too high. Thanks for the original reference, RapmasterD. You did get my point, but there is a second one that others seem to be missing.
The earlier you start, the LESS you have to save. By starting early, Susan is able to spend the difference ($100,000 to $150,000) on whatever the hell she wants and she STILL ends up with more money than Bill. Un fucking believable.

EDIT: I showed this article to my 22 y.o. bonus kid after I posted this comment. He has inherited about 100k and I'm trying to explain to him that if he invests it wisely now, he'll never have to save a penny for retirement and he can retire early. Believe me, this is a completely foreign concept to a college student who's never held a job. He pointed out that I'd made a mistake in interpreting the chart, so I fixed my post with a huge grin on my face. I think he's beginning to understand the concept. Hooray!

[skyrefuge]

but there is a second one that others seem to be missing.
The earlier you start, the LESS you have to save. By starting early, Susan is able to spend the difference ($100,000 TO $150,000) on whatever the hell she wants and she STILL ends up with the most money. Un fucking believable.

Yes, this is the exact amazing and mind-blowing point that potm and I are saying gets easily obscured by that version of the chart! So if anyone missed that point (potm and I sure didn't), it's the fault of that chart.

I can totally understand people looking at the "Chris" curve way up there and saying "yeah, ok, if I start early and save for a long time, I'll end up with a lot of money. Thanks". It makes them ignore the relatively small difference between "Susan" and "Bill", which is the where the mind-blowing part of the chart actually lies.

So that's why good versions of the chart don't include "Chris", and simply highlight the difference between "Susan" and "Bill". (all but the dumbest will then figure out "Chris" on their own when they say "...and whoa, imagine if Susan hadn't stopped investing at 35!...")

[wtjbatman]

I think the majority of people understand that if you invest money every year from age 25 or 30 or 35 onward, you will end up a "millionaire" (or whatever).

The real problem is obvious after reading the comments to this article and other articles like it. The majority of people don't believe it's possible to save enough every year, so they don't even try. And, in reality, I don't think it's possible for most people. Because most people spend at least as much as they earn every year, and don't leave room in their budget for saving for things like a retirement that they believe is at least 30 or 40 years away.

People don't need to learn that savings compounds. They need to learn how to budget properly and to always spend less than they earn.

[Dicey]

People don't need to learn that savings compounds. They need to learn how to budget properly and to always spend less than they earn.

So sorry to contradict you, but the average wage earner cannot save enough to retire, let alone early. Budgeting and saving simply will not get you there. You must learn how to make your money grow in order to win the game. Real Estate is awesome because it allows you to leverage your money. Employer matches are also "free" money. The stock market lets you invest small amounts of money, which compound into big amounts of money over a period of many years. The things holding most people back are an unwillingness to learn [about money] and lack of faith that they can achieve such an audacious goal without a ton of money to start.

If you can't save $5k a year, start with $1k. If you can't save $1k, start with $100. Begin investing your savings as early as you possibly can. Over time it gets easier, especially as you watch your account balances grow. Funny, you don't hear from the people who are doing or have done it, you primarily hear from the ones shouting that it can't be done. It can be done, as hundreds of readers of this forum can attest.

Edited to add words in brackets above.

[wtjbatman]

The things holding most people back are an unwillingness to learn and lack of faith that they can achieve such an audacious goal without a ton of money to start.

I definitely agree with the second half of that statement. People simply don't believe that by saving and investing they will be able to retire... so they spend all they make (or spend more, and go into debt), and figure retirement will take care of itself. And then they are those people we read about who are working at 65+, not by choice, but by need.

[Dicey]

You're right, wtjbatman. I edited my post to make the first half of that statement a little more specific.

[The Fake Cheap]

The version I like goes something like this:

Skippy invests $5,000 a year from age 22 to 32, and ends up with $923,000 at age 60. (7% annual return)
Norbert, says he will delay saving, but catch up to Skippy by doubling his investment, so he invests $10,000 a year from age 32 to 60 and ends up with $863,000 (same 7% annual return).   He invested over 200K more, and ended up with over 50K less.

In either example the root of the story is the power of compounding, use it to your advantage.

[sol]

I was fed this demonstration exercise in high school math in the early 90s when we covered exponential growth.

I suspect that math teacher was exceeding the curriculum, though, as I'm pretty sure it wasn't part of the standard material.

[MDM]

Skippy invests $5,000 a year from age 22 to 32, and ends up with $923,000 at age 60. (7% annual return)
Norbert, says he will delay saving, but catch up to Skippy by doubling his investment, so he invests $10,000 a year from age 32 to 60 and ends up with $863,000 (same 7% annual return).   He invested over 200K more, and ended up with over 50K less.

I (and Excel) can reproduce Norbert's numbers: FV(7%, 28, -10000, 0, 1) = $863,465

Can't reproduce Skippy's: FV(7%, 10, -5000, 0, 1) = $73,918.  Then $73,918 * (1 + 7%)^28 = $491,469.  What am I missing?

[MDM]

How many years, N, of person A investing amount "p" at interest rate "i" does it take before A can stop adding (but remain invested) and forever remain ahead of person B who then starts investing amount "x * p" at interest rate "i"?

The equation is N = ln(1 + i + x) / ln(1 + i)  -  1

E.g., for
x = 1 (same amount/yr invested)
i = 8%/yr
N = ln(1 + .08 + 1) / ln(1 + .08) - 1 = 8.5 years

x = 2 (second person invests twice as much per year)
i = 7%/yr
N = ln(1 + .07 + 2) / ln(1 + .07) - 1 = 15.6 years


Derivation is based on the interest generated by A's account becoming equal to B's investment

Value of A's account after N years = p * [(1+i)^(N+1) - (1+i)] / i   (formula for Future Value, investing at the start of the year)

Multiply by interest rate i and set equal to x * p.  The i and p terms cancel to give (1+i)^(N+1) - (1+i) = x.  Further algebra gives (1+i)^(N+1) = 1 + i + x.

Then take the natural log of each side and rearrange some more to get the final equation.

For whatever it's worth.... 

[Dan_at_Home]

Susan, who invests $5,000 per year only from ages 25 to 35 (10 years). $50,000 total investment
Bill, who also invests $5,000 per year, but from ages 35 to 65 (30 years). $150,000 total investment
And Chris, who also invests $5,000 per year, but from ages 25 to 65 (40 years). $200,000 total investment

If you look at the formula for compound interest, time (number of years) is in the exponent, thus, it by far has the most impact on the final amount.  In fact, it absolute dominants any of the other factors. 

The difference between starting investing at age 25 and 35 is huge.  In fact, I always wondered, if you had just had a baby and put $2000 in a retirement account for that baby and nothing else after that, the math shows the baby would have a balance of $162k in todays dollars (assuming it was invested in stocks) when they reach age 65

[arebelspy]

How many years, N, of person A investing amount "p" at interest rate "i" does it take before A can stop adding (but remain invested) and forever remain ahead of person B who then starts investing amount "x * p" at interest rate "i"?

The equation is N = ln(1 + i + x) / ln(1 + i)  -  1

E.g., for
x = 1 (same amount/yr invested)
i = 8%/yr
N = ln(1 + .08 + 1) / ln(1 + .08) - 1 = 8.5 years

x = 2 (second person invests twice as much per year)
i = 7%/yr
N = ln(1 + .07 + 2) / ln(1 + .07) - 1 = 15.6 years


Derivation is based on the interest generated by A's account becoming equal to B's investment

Value of A's account after N years = p * [(1+i)^(N+1) - (1+i)] / i   (formula for Future Value, investing at the start of the year)

Multiply by interest rate i and set equal to x * p.  The i and p terms cancel to give (1+i)^(N+1) - (1+i) = x.  Further algebra gives (1+i)^(N+1) = 1 + i + x.

Then take the natural log of each side and rearrange some more to get the final equation.

For whatever it's worth....

This is why I read MMM.

The difference between starting investing at age 25 and 35 is huge.  In fact, I always wondered, if you had just had a baby and put $2000 in a retirement account for that baby and nothing else after that, the math shows the baby would have a balance of $162k in todays dollars (assuming it was invested in stocks) when they reach age 65

There was an interesting thread awhile back about how little it would take to guarantee a basic FI level for your kids who are babies, or your unborn grandkids.

[Chranstronaut]

The difference between starting investing at age 25 and 35 is huge.  In fact, I always wondered, if you had just had a baby and put $2000 in a retirement account for that baby and nothing else after that, the math shows the baby would have a balance of $162k in todays dollars (assuming it was invested in stocks) when they reach age 65

There was an interesting thread awhile back about how little it would take to guarantee a basic FI level for your kids who are babies, or your unborn grandkids.

http://forum.mrmoneymustache.com/investor-alley/buying-fire-for-a-child-about-70k/

[sol]

There was an interesting thread awhile back about how little it would take to guarantee a basic FI level for your kids who are babies, or your unborn grandkids.

http://forum.mrmoneymustache.com/investor-alley/buying-fire-for-a-child-about-70k/

And since I didn't see it mentioned here or there, Joshua Kennon has written about this same topic.  His focus is primarily on building wealth so you can buy a bunch of stupid luxury goods, but the math works out the same even if you waste it afterwards.

[DrF]

Skippy invests $5,000 a year from age 22 to 32, and ends up with $923,000 at age 60. (7% annual return)
Norbert, says he will delay saving, but catch up to Skippy by doubling his investment, so he invests $10,000 a year from age 32 to 60 and ends up with $863,000 (same 7% annual return).   He invested over 200K more, and ended up with over 50K less.

I (and Excel) can reproduce Norbert's numbers: FV(7%, 28, -10000, 0, 1) = $863,465

Can't reproduce Skippy's: FV(7%, 10, -5000, 0, 1) = $73,918.  Then $73,918 * (1 + 7%)^28 = $491,469.  What am I missing?

The Fake Cheap accidentally computed the return for $5000 annual contribution for 38 years with a return of 7% = $923,201. $190,000 of which was his own cash. Still comes out ahead by starting earlier (you can add less per year), but not as impressive as his post.

[MDM]

The Fake Cheap accidentally computed the return for $5000 annual contribution for 38 years with a return of 7% = $923,201. $190,000 of which was his own cash. Still comes out ahead by starting earlier (you can add less per year), but not as impressive as his post.

Yes, that fits - thanks.

[Scandium]

Unfortunately, the comments on that page are pretty depressing. 

"What 25 year old can save $5,000 a year"? 

"Maybe if I was making 60K a year I could save $5,000!!"

Or:

"What a bunch of MALARKEY. They always forget to factor in that you almost never get the 5-6+% returns" 

/facepalm

yahoo comments are always the worst mess of uninformed idiots and conspiracy nuts, or both.

here's a representative sample
"none of this will matter because pretty soon, the idiots in WashDC will sign Executive Orders to sieze everything anybody worked hard & saved for.....it's happening to cattlemen in NewMexico whose grazing lands are now sealed off (for the sake of ONE mouse) and whose baby calves are decimated by Protected Endangedered Wolves.....the government is taking away land, it is taking away earnings thru taxes on everything, it will only get worse until nobody owns anything anymore. And nobody is making any 7% interest on their invesments. Actually every person in America owes about $700,000 towards the National Debt. Every single person's wages for the next 99 years is required to pay off Unfunded Liabilities. There IS NO MORE MONEY in the government to spend on anything, yet all these newbies to Congress think they're going to magically win approval from voters with their spanking New Project? Read the book "Dead Men Ruling." We're screwed. But I am still saving, and scared. "

[RapmasterD]

People don't need to learn that savings compounds. They need to learn how to budget properly and to always spend less than they earn.

So sorry to contradict you, but the average wage earner cannot save enough to retire, let alone early. Budgeting and saving simply will not get you there. You must learn how to make your money grow in order to win the game. Real Estate is awesome because it allows you to leverage your money. Employer matches are also "free" money. The stock market lets you invest small amounts of money, which compound into big amounts of money over a period of many years. The things holding most people back are an unwillingness to learn [about money] and lack of faith that they can achieve such an audacious goal without a ton of money to start.

If you can't save $5k a year, start with $1k. If you can't save $1k, start with $100. Begin investing your savings as early as you possibly can. Over time it gets easier, especially as you watch your account balances grow. Funny, you don't hear from the people who are doing or have done it, you primarily hear from the ones shouting that it can't be done. It can be done, as hundreds of readers of this forum can attest.

Edited to add words in brackets above.

Actually, the penultimate thing people need to learn is the power of compounding. And yes, starting earlier is key. I'm living proof of that. Or so my butler tells me. https://www.youtube.com/watch?v=gpaOy8b8X6A

[astvilla]

The things holding most people back are an unwillingness to learn and lack of faith that they can achieve such an audacious goal without a ton of money to start.

I definitely agree with the second half of that statement. People simply don't believe that by saving and investing they will be able to retire... so they spend all they make (or spend more, and go into debt), and figure retirement will take care of itself. And then they are those people we read about who are working at 65+, not by choice, but by need.

https://www.youtube.com/watch?v=45Ouqrnku2g

I concur. You can't invest unless you learn to save first. Unfortunately so many people spend, often times to keep up our "status" with the people around us.

However I do believe there are people who don't make enough to even think about saving. Minimum wage workers come to mind. You can barely cover the costs of living and then you have to save as well? The little money you save in anyone's mind won't make as much a difference invested as opposed to buying a television, etc. A television would make more difference in a minimum wage worker's life as opposed to 10 shares of a company. There's also more immediate satisfaction w/buying as opposed to saving/investing. Making 40k in the 80s is more than 100k today in part because of buying power. Taxes, education, healthcare have soared and so forums like MMM pop up to try and keep up with stagnant wages and increasing wealth gap. I'm better than 95% of my peers for my age group and I feel like I'm treading water. The tips on MMM though help a bit to make looking to the future a bit more hopeful.

[Scandium]

ahh, the endless discussion. Every time, it goes something like this:
"people should save more money"
"But minimum wage people!"

[randommadness]

I just like reading about the one person who said they couldn't afford [investing] at 30 because they were only making 30k and by then had a mortgage, kids, and a car payment.

All three of which are choices...  I get tired of reading articles/comments where someone complains that they had to move back home (as a couple) to make sure their kids had what they need as they were crushed under stifling school [whatever] debt.

Hey guess what, have kids when you're financially prepared, not when you "feel ready."

/rant

[sol]

Hey guess what, have kids when you're financially prepared, not when you "feel ready."

If there is a single life decision that people are universally poor at making, when and how to have children has got to top the list. 

We're biologically wired to procreate.  It's deeper in our DNA than the desire for a fast car or a shiny new TV, much less a bulging IRA.  Asking people to show logical discretion when presented with the urge to have sex with each other is like telling a starving man he can taste but not swallow.  It's almost impossible to overcome the impulse, so I sort of understand why so many of them choose poorly.

[Datastache]

It's an unfortunate dilemma. We're biologically hardwired for behaviors that tend to result in procreation at a young age, since that's when we're best at creating physically healthy offspring...yet we may not have the optimum financial and emotional resources for raising them until years or decades later.

Really, we just need to come with a system that allows us to make lots of babies in our early 20s and then cryogenically freeze the newborns until we're ready to raise them. ;)

[maki]

How many years, N, of person A investing amount "p" at interest rate "i" does it take before A can stop adding (but remain invested) and forever remain ahead of person B who then starts investing amount "x * p" at interest rate "i"?

The equation is N = ln(1 + i + x) / ln(1 + i)  -  1

E.g., for
x = 1 (same amount/yr invested)
i = 8%/yr
N = ln(1 + .08 + 1) / ln(1 + .08) - 1 = 8.5 years

x = 2 (second person invests twice as much per year)
i = 7%/yr
N = ln(1 + .07 + 2) / ln(1 + .07) - 1 = 15.6 years


Derivation is based on the interest generated by A's account becoming equal to B's investment

Value of A's account after N years = p * [(1+i)^(N+1) - (1+i)] / i   (formula for Future Value, investing at the start of the year)

Multiply by interest rate i and set equal to x * p.  The i and p terms cancel to give (1+i)^(N+1) - (1+i) = x.  Further algebra gives (1+i)^(N+1) = 1 + i + x.

Then take the natural log of each side and rearrange some more to get the final equation.

so much <3

[Mr. Frugalwoods]

This seems so simple to us, but in my office of ~30 extremely bright young coworkers about half raised their hand for Bill.

Regular people have no idea how compound interest works.

This style of graph (mine is "Mauricio and Lauren") managed to increase 401k participation in my company from 80% to 80% in a single month.

[Bob W]

Love the graph, wish I was 25. 

Here is a problem.

At least 2 out of the 3 will receive negative returns on their investments.  That's right negative.  So the guy putting in 5K for 40 years is likely to have no more than 200K or 70K adjusted for inflation.    The person who put in 5K for 10 years is likely to have 50K or 20K adjusted. 

The will also tap the money for home purchases and big ticket items. 

The reason is (and it has been posted here before) is that most so called investors receive negative returns because they buy high and panic sell low.  That makes it great for the rest of us. 

So while the theory is nice.   The reality is it just doesn't work that way for most (80%?) folks.   Old style pensions where much better in most cases.   

[arebelspy]

Joshua Kennon wrote about this article today:
http://www.joshuakennon.com/power-compounding-student-loan-debt-communism-stealth-wealth/

[josstache]

Here is the dilemma for many young people:

(A) Pay off student loans that charge 6.8% interest, or
(B) Invest in the market, all the while earning uncertain returns and exposed to losses even over the medium-term, someday paying taxes on the gains and/or not being able to access the money until you are elderly,  (most people are unaware of the tricks for early withdrawal from tax-advantaged accounts).

It seems clear to me that paying off student loans is the much better investment.  It goes without saying that paying off any credit card balance is an even better investment.  It's fine to tell people to invest in the market to earn market returns, but they first need to get above-market returns paying off their debt.  That they don't pay off their debt as quickly as they could is an issue of savings rate.

In some ways the article thus misses the point.  It's like telling someone who eats at McDonald's everyday, "you should only cook with organic ingredients!"  The response to that is, "I can't even cook, so your advice is pointless."

[MDM]

Joshua Kennon wrote about this article today:
http://www.joshuakennon.com/power-compounding-student-loan-debt-communism-stealth-wealth/

Great article - thanks for sharing.

[YoungInvestor]

I think pretty much everyone is already aware of exponents at this point. Talking about the "magic" of compounding is getting old as it is both fairly simple and quite intuitive. It may be interesting to show to a younger crowd, perhaps to high school students.

Then again, the same calculation with 6.25% return or less would show the opposite result. 7% after inflation (the 5000 stays the same during the full time period) seems rather optimistic to me.

[MDM]

I think pretty much everyone is already aware of exponents at this point. Talking about the "magic" of compounding is getting old as it is both fairly simple and quite intuitive. It may be interesting to show to a younger crowd, perhaps to high school students.

Then again, the same calculation with 6.25% return or less would show the opposite result. 7% after inflation (the 5000 stays the same during the full time period) seems rather optimistic to me.

See table below.
Columns are for the investment return at the top.
Rows are for the multiple (of the first investor's amount) used by the second investor.
Table entries are the time in years after which the first investor wins.

The investment returns are nominal, not real, because these are Future Value calculations.  One could attempt this with discounted cash flows and Present Value calculations but the time to explain the question could exceed the attention span of many in the target audience.

	4%	5%	6%	7%	8%	9%	10%
1	17.2	13.7	11.4	9.8	8.5	7.6	6.8
2	27.3	21.9	18.2	15.6	13.6	12.1	10.9
3	34.6	27.7	23.0	19.7	17.3	15.3	13.8
4	40.2	32.2	26.8	23.0	20.1	17.9	16.1
5	44.9	35.9	29.9	25.7	22.5	20.0	18.0

[Indexer]

I think the majority of people understand that if you invest money every year from age 25 or 30 or 35 onward, you will end up a "millionaire" (or whatever).

The real problem is obvious after reading the comments to this article and other articles like it. The majority of people don't believe it's possible to save enough every year, so they don't even try. And, in reality, I don't think it's possible for most people. Because most people spend at least as much as they earn every year, and don't leave room in their budget for saving for things like a retirement that they believe is at least 30 or 40 years away.

People don't need to learn that savings compounds. They need to learn how to budget properly and to always spend less than they earn.

Trust me, most people don't know that is how you become a millionair.  They think you do that by becoming a CEO, starting your own super business, picking the 'right' stock, going to hollywood, the Lottery, etc.   

I think pretty much everyone is already aware of exponents at this point. Talking about the "magic" of compounding is getting old as it is both fairly simple and quite intuitive. It may be interesting to show to a younger crowd, perhaps to high school students.

I actually do this for high school students.  Its pretty fun.  I start off asking who wants to be a millionair.  I show how the Rule of 72 works, then we assume 7.2% growth so that we get nice even numbers where their account doubles every 10 years.  Then I show how 1k invested at 20 turns into 32k by 70.  Now add a zero, 10k turns into 320k!   Invest 10k at 20, another 20k by 30 because you have a real job, another 20k by 40, another 30k by 50, and now your house is paid off so 40k by 60.  (So we are talking about 1k to 4k a year in savings.... nothing really.)  When I'm done it looks like...

20:10k
30:20     20k
40:40     40    20k
50:80     80    40    30k
60:160   160   80    60    40k
70:320   320   160   120  80   =  $1,000,000

(I start at the top of each column and write down, then go to the next column, so they see 10k turn into 320k, then 20k turn into 320k, etc., etc.... = 1million)

It does at least get them thinking about it, and then I drill how the 90k invested between 40 and 60 only ends up being worth a little more than the original 10k invested at 20(360k vs 320k) to show how important starting early is.

[MDM]

I actually do this for high school students.

Good target audience - well done!

[Khan]

I actually do this for high school students.

Good target audience - well done!

This. The one thing I got out of high school finance classes was the power of compounding interest. Mainly in the form of the 25-35 investor, vs. the 35-60(or infinity) investor. I'd point you to this Big Think lecture for different ways to explain some basic concepts to high schoolers.
https://www.youtube.com/watch?v=WEDIj9JBTC8

[dragoncar]

Ya know, I understand the concept of compounding.  But I never really ran the numbers before.

If we were to maintain our current savings rate (real) for the next 30 years, assuming 5% returns (real), we would have $17 million (today's dollars) at 65.  That blows my mind, since we are high earners but not, like, captains of industry or anything like that.

[DrF]

Ya know, I understand the concept of compounding.  But I never really ran the numbers before.

If we were to maintain our current savings rate (real) for the next 30 years, assuming 5% returns (real), we would have $17 million (today's dollars) at 65.  That blows my mind, since we are high earners but not, like, captains of industry or anything like that.

If you look at the yearly breakdown, it's those last 4-5 years that are truly crazy!!

[DrF]

Ya know, I understand the concept of compounding.  But I never really ran the numbers before.

If we were to maintain our current savings rate (real) for the next 30 years, assuming 5% returns (real), we would have $17 million (today's dollars) at 65.  That blows my mind, since we are high earners but not, like, captains of industry or anything like that.

So, I just ran your numbers, and you have to be putting in like $250,000 per year (assuming starting at $0) to reach $17M in 30 years. Not captains of industry????

[DoubleDown]

Ya know, I understand the concept of compounding.  But I never really ran the numbers before.

It was that exact phenomenon that drove me towards the concept of FIRE, before there was an MMM. Around age 32 I was updating my handy spreadsheet to track our 401(k) and other investments, with forecasts out into the future. I noticed that if we kept up our current rate of investing with modest raises over the years, we'd end up with a ton of money way before traditional retirement age, and a ridiculous amount of unnecessary money if we kept it up until age 65. All of a sudden I went, "Hmmmm....."

At the time, I thought I was being really radical with the notion of retiring around age 50 with something like $2 million, and saving about 20% of our income.

[The_Dude]

I saw an example of this my first semester in college.  Back then the IRA limit was 2k per year and the example was 22-30 vs 30-65 at 8% return.  It blew my mind and I started investing in the market before I graduated college.  That plus reading the millionaire next door were the two single biggest influences on my spending and saving habits.

I also, quickly ran the scenario of $2k saved once at a kid's birth which under the above assumptions beats them both.  Now days with higher IRA limits difference isn't as large.  Illustrated by the formula and table in posts before mine.

Finally, I also agree that the article blows it by including "Chris"

[RapmasterD]

Joshua Kennon wrote about this article today:
http://www.joshuakennon.com/power-compounding-student-loan-debt-communism-stealth-wealth/

I have absolutely no idea who this guy is, but as I was perusing MMM last week, somehow when I woke up from a doze his blog was on my screen. Really great content, and this eclectic post in particular is so well thought out and written. A highly recommended read. Thanks for the link, Vegas!

[arebelspy]

Joshua Kennon wrote about this article today:
http://www.joshuakennon.com/power-compounding-student-loan-debt-communism-stealth-wealth/

I have absolutely no idea who this guy is, but as I was perusing MMM last week, somehow when I woke up from a doze his blog was on my screen. Really great content, and this eclectic post in particular is so well thought out and written. A highly recommended read. Thanks for the link, Vegas!

No problem!

I've read his stuff for years, super high quality content, I highly recommend it.

[Kriegsspiel]

Ya know, I understand the concept of compounding.  But I never really ran the numbers before.

If we were to maintain our current savings rate (real) for the next 30 years, assuming 5% returns (real), we would have $17 million (today's dollars) at 65.  That blows my mind, since we are high earners but not, like, captains of industry or anything like that.

So, I just ran your numbers, and you have to be putting in like $250,000 per year (assuming starting at $0) to reach $17M in 30 years. Not captains of industry????

Well, dragoncar lives somewhere around SF, so $250,000 is probably a 'make a fart noise and wave your hand around' amount. Just a paltry sum.

Disclaimer: This was intended as a joke.

[dragoncar]

Ya know, I understand the concept of compounding.  But I never really ran the numbers before.

If we were to maintain our current savings rate (real) for the next 30 years, assuming 5% returns (real), we would have $17 million (today's dollars) at 65.  That blows my mind, since we are high earners but not, like, captains of industry or anything like that.

So, I just ran your numbers, and you have to be putting in like $250,000 per year (assuming starting at $0) to reach $17M in 30 years. Not captains of industry????

Well, dragoncar lives somewhere around SF, so $250,000 is probably a 'make a fart noise and wave your hand around' amount. Just a paltry sum.

Disclaimer: This was intended as a joke.

Haha you guys got me.  Yeah, we're on track for about $200k/year savings, plus what we have now.  But I'm just a lowly associate at a law firm (mid-range compensation for biglaw) and my wife is only a pediatrician (they make the "small bucks" in the doctor world).  Decamillionaire never crossed my mind.

And yes, SF is the land where there's a $100k Tesla on every block.

[trailrated]

How come these articles always start at 25? If you go the high school to college and out in 4 years route shouldn't you start at 22. Or is that not as pretty of a number as 25...granted I did start actually saving at 25.