It is tough to accumulate cash. A savings habit is a good thing, but for those of you who are weak, there is the phenomenon of "compounding" that can rescue you.
Just for fun, lets say that your parents gave each of you Grasshoppers $10,000 when you were 18 years old. The money got placed in a deferred account that grows at a compounded tax free rate of 10% each year. The compounded annual rate of growth of the stock market over the last 75 years has been slightly over 10%. Now you don't have to add another penny. The only requirement is to keep your hands off the account.
So how does this work. You start with $10,000 and it grows 10% the first year. 10% amounts to an additional $1,000 bringing your new total wealth to $11,000. You didn't have to add a single dollar. In year two, you start with your $11,000 and it grows 10% or another $1,100 to bring your total of $12,100. You get the idea! The original $10,000 is left to keep growing along with the compounded annual gains. You can do you own math.
After 10 years, your original $10,000 account compounded at 10% will be worth $25,937.42.
After 25 years, your balance would be $108,347.03. Remember, you haven't added one new cent of savings.
After 40 years (or when you reached age 58), you have $452,592.23.
And then, if you can keep your hands off the deferred account for 49 years until you reach the age of 67, you will have $1,067,188.90. That is right! You would be a millionaire. You never saved another dime after the original $10,000. You just watched it grow. Of course there is the small matter of getting the first $10,000 set aside at age 18. If it didn't happen for you, maybe you can figure out a way to make it happen for your kids..
So I was thinking with my imaginary example (I emphasize imaginary), if your mom and I had set aside $10,000 for each of you Grasshoppers at age 18, what would you have in those original accounts.
Grasshopper No. 1, Account Balance on 46th birthday, $144,209.89.
Grasshopper No. 2, at age 45, $131,099.90.
Grasshopper No. 3, at age 43, $108,347.03.
Grasshopper No. 4, at age 34, $ 45,949.72.
Grasshopper No. 5, at age 29, $ 28,531.17.
Remember, this was achieved with a simple deposit of $10,000 for you at age 18 and achieving gains that match the growth of the stock market over time. It takes advantage of "compounding". Use the concept in your life. It requires no additioal savings after the original investment.
Imagine if you saved additional amounts each year. Imagine the growth! Imagine! Holy sh--!
Love,
Dad