A Lesson On Compounding Interest For My Niece
Aug 7th, 2007 by Jennifer Lynn
Lillian Snow makes her debut
Early this morning, an itty bitty pink ball of mucous was lifted from her sheltered pod and let out an enormous squall. Lillian Snow scrunched open her eyes for the first time, as an exhausted Daddy stared in disbelief at his new glistening daughter.
After more than 18 hours of arduous labor, my brother’s baby girl had finally popped into the world.
What an amazing feeling it was to cradle that infant burping beauty and know I’m an Auntie now. And what would Momma Kat and Daddy Joe think if I passed along information on compound interest to my little niece?
From Wealth in a Decade by Brett Machtig:
Compound interest is truly amazing. If you were given $1.00 at birth and were able to double that dollar every year:
- At age 15, you’d have enough to buy a mid-priced car
- At age 18, you’d be able to buy a home valued at $130,000
- At age 22, you’d be earning $200,000 in interest from your investments if they were invested at 10 percent
- At age 30, you could own a $1 million home in over 500 cities worldwide
- At just over 43 years of age, you would be able to pay off the national debt of approximately $5 trillion
- Just in time for retirement at age 65, you would have amassed the tidy sum of $18,000,000,000,000,000,000. I really have no idea what the name is for that amount of money. Suffice it to say that you could give about $72 billion to every man, woman, and child in the United States (assuming a population of 25 million).
Not too shabby for some early investing.
=^..^=
Except that this is compound interest at a required 100% return every year. So not the compound interest that most of us know. What do the numbers look like at 8%? That would be a more realistic picture (and still motivating, because if you start early, you are pretty much set for retirement).
I wish my parents invested for me, geez!
“If you were given $1.00 at birth and were able to double that dollar every year:”
At first read that sentence is somewhat deceiving. I think you meant be able to double that dollar plus all the profit you accumulated from it every year. (If you only double the original dollar every year your would only have less than $20 at the age of 15…)
Compound interest is definitely one of the great wonders of the world. When I was 18 or 19 my stock broker told me that he had just had a grand-daughter born and with a modest $500 a month investment in her name, he figured he could make her a millionaire by the time she was 18 or 19 with average market performance.
I wonder how well she is doing…
BTW: I enjoy reading your blog. You seem to have accumulated quite the financial knowledge at such a young age.
The name of that tidy sum at age 65 is 18 quintillion.
I also wonder how Jon’s stock brokers granddaughter is doing…a milllionaire at 19….I am a little jealous!
Compound interest was called the 8th wonder of the world by Benjamin Franklin. And you don’t need anything close to 100% return to do amazingly well. The value of Real Estate in the United Kingdom increased by 14 fold (100,000 grew to 1,400,000) in 31 years. Sounds amazing doesn’t it? That actually is just a 9% annual rate of return with compounding working for you.
Another way to look at it. $5,000 invested when a baby is born earning 18% (granted a very nice rate of return) would grow to nearly $100,000 on their 18th birthday.