Millionaire Librarian

Einstein is attributed with the saying “”Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

Using my example of Mary who is able to save $200 a month from age 25 until age 67 earning 10% annually. She will have more than $1,548,000 after ten years. How much do you think Mary contributed to this huge amount of money? Would half be believeable? That would a little over $750k. Obviously, this post is about compounding so it may be less she put in.

How about half of that being $325k? It is even less than that. Over the forty two years Mary only contributed $100,800. That means that over 1.4 million was growth and compounding. Take a second to reread that last sentence; over 1.4 million was growth and compounding. If Mary delayed investing one year, then she would have around $150k less. Additionally, if her money spends one more year compounding then she will have a similar amount more. This is because of how percentages work. 10% of when she is 26 after only one year of investing is $240. 10% of 1.5 million is $150k.

This is why it is extremely important to save anything and everything as early as you can. You want to get your snowball as big as possible early on, then you can start taking your foot off the gas once your money begins working as hard as you do. Think of it this way. If you are at $1.5 million invested assets. You could burn $150k a year in a bonfire and if you were able to continue living off your income from your job then you would be in the exact same place next year minus some inflation cost of hopefully around 3%.

It is all about scrimping and scraping for that big initial snow ball. Charlie Munger says it bluntly and best: “the first 100k is a bitch, but you gotta do it.”

Huge financial snow balls is why the rich keep getting richer and they are able to pass down generational wealth, which we can look how to build in my next post.