Lessons from Reach Academy: The power of compound interest!

For the past week I have been teaching young men about finance. We have covered a whole range of topics from the origins and purpose of money, to stocks, from crypto to foreign currencies. However the one topic that seemed to blow most people away was the power of compounding. The genius himself even has a quote attributed to him:

It's safe to say that teenage boys don't necessarily have retirement as the number 1 topic on their minds (I can take a pretty good guess as to what the top topic is for most). That being said, when we went through the concept of compound interest and how much money you can end up with if you are able to save a little bit each and every month while giving it a bit of time, the scholars' eyes lit up. I could almost see the "mind blown" word balloons pop up from most in the room.

This is a summer class and not designed to be heavy on mathematical calculations. Therefore I relied on an online compound interest calculator to come up with the calculations quickly while also providing a nice graphical representation of the compounding effect. Here is a nice one: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

In order to make the point, I used the simple example of saving $100/week for 40 years. I assumed an 8% return (with a variance of +/- 2%). Here were the results:

The results were as follows: the 8% annual return would yield a total balance of just over $1.5 million. This would result from a total principal investment of $208,000. Not bad grasshopper! At the low end one could still end up with $862,000 assuming a 6% return and over $2.7 million with a 10% return. Suffice it to say, even taking into account inflation, any one of these sums should be a great starting point to afford a decent lifestyle in retirement and at a minimum greatly outpace the savings of average Americans.

The buzz in the room was instantaneous and and questions continued to flow in long after the session had ended.

I also made sure to point out that the reverse can be true if one is unable to pay off their credit card balances in a short period of time. I used a parallel example owing $5,200 (the equivalent of what we assumed we could save per year in the previous example) while only paying off the minimum balance of roughly $100 per month (in reality the minimum balances would change over time). A $5,200 initial purchase would end up costing more than double and would take over 10 years to pay off!

Mind blown part 2!

Finance professionals do not always agree on what the best investment strategy is, or which stock to buy, or if the long term health of the economy, or whether crypto currencies are for real, but I think if you polled them on the most important topics to know, the concept of compound interest would rank at or near the top of the list. Others topics may include the concepts of: Net Present Value, Stock Market Valuations, and Short Selling.

This is so much fun...