Tuesday, July 28, 2009

Compound Interest

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

Insurance, Investments, Estate Planning, Retirement Planning and Income Taxation - I found each course interesting. However, sitting in Eugene LaHanier’s course (Financial Planning) at Fresno State 9 years ago, it was the power of investment compounding that first caught my attention.

He started with a fact pattern and then asked us to guess the results - nobody came close. The example used was something similar to our “Ben and Jerry” spreadsheet on the website. Beginning at the age of 22, investing $2,000 a year (compounding at 10%) until the age of 65 ($88,000 invested) results in what amount of wealth? The answer: 1.4 million dollars. I could not believe it. $2000 per year is only about $165/mo – just about anyone can do that. I was amazed by the concept.

Years later, I realize how much I did not know. I have learned how difficult it can be to spare that money each month. I have learned there are some things you cannot control. I have learned that spending money only begins with the purchase of a house. But the compounding concept remains powerful. Most importantly, I have learned how to apply it.

I enjoy the opportunity to meet with young people about these concepts. Often all that separates them from action is knowledge. Since it is not always feasible to meet with them, I created a link on our webpage dedicated to these issues. If you want to share some of these concepts with your children or grandchildren, click on the “young investors” link on the left hand margin of our webpage. There is some explanation, a roadmap to get started, and a few spreadsheets to help tell the story of investment compounding. Please provide us with any feedback you may have.

No comments: