Compound Interest, a la Shmoop.
It's not how much you care about camp.
Question: How do you become a billionaire?
Answer: This guy... the richest man in America for a long time... said, "Live to be 300."
If you save money for long enough, you get there.
If you saved ten grand a year, you get to a billion in a billion divided by ten thousand
years or... one hundred thousand years.
That's a little beyond the current average life expectancy.
So...
there's gotta be another way.
Yeah, Compound Interest.
That is, you invest your money -- stock market, bonds, private equity, venture capital...
whatever... and you make some kind of return.
Put in a dollar today and get two dollars back in 5 years and you've made about 20%
a year.
So if you compound your interest, you start with a new amount each year.
Let's see how that works in real life.
Over the last hundred or so years, the stock market has compounded...
... with dividends reinvested... and forgetting taxes at about 10% a year.
Let's start with ten grand.
You've mown a lot of lawns to get there -- and you invest it.
After 1 year of compounded interest, it's worth $11,000.
Yep, you made a thousand bucks doing...
nothing.
The coolest element in compound interest is that now you start out the year with eleven
grand.
And you get to... compound it.
Blam.
And after 1 more year, it's now $12,100 Let's think about the same problem, but this
time we'll use equations.
Remember, we start with $10,000 and compound at 10% per year for 1 year.
Note that, after the first year, you made exactly a grand.
But now -- since you've started with a higher base of 11 grand instead of 10 grand...
... you get to compound off of a higher number... and in year two you've made a hundred bucks
more for the privilege.
Taking a closer look, we can see that we're building a thing called the equation for Compound
Interest.
A is the ending amount, P is the starting amount, r is the interest rate, n is the number
of times compounding happens per year, and t is the number of years your money is being
compounded.
For now, we'll assume compounding happens once a year, so n = 1.
And the process continues.
So let's say you did nothing but sit on your fat duff the rest of your life...
other than save that 10 grand when you were 25...
...thanks again for mentioning us in your will, Grampa Warbucks.
Here's what that 10 grand looks like, compounded over an expected 60 remaining years of your
life.
Here we are at Year 8.
We've seen our 10 grand blossom into over 21k.
It's certainly moving in the right direction... in fact, we've more than doubled our initial
investment...
...but it's not quite enough to pack it all in and retire to the Caymans.
Well, sheesh.
It's been only a decade, and we're only sitting on twenty thousand dollars.
Is this compound interest thing really all it's cracked up to be?
Let's move on down the road...
Year 15.
We've doubled our money yet again.
Nearly 42k, in the bank.
Assuming that, by this point, we don't owe large sums of money to anyone who is threatening
to break our legs...
Year 22.
Doubled again, to over 81,000.
Year 29.
Nearly 160k.
Up and up we go...
Until finally... check out Year 60.
Over three million samolians.
Which, sixty years from now, might be almost enough to fill up your gas tank.
So, we start with $10,000 and compound at 10% per year for 60 years.
Okay, sure...
60 years is a long time from now...
...but think how nice it's going to be to have all those millions...
just sitting there, waiting for you to get old and retire.
And this example only demonstrates what happens if you invest $10,000 in your entire lifetime.
If you start with a larger investment...
...or contribute additional funds along the way...
...it should be easy to see how one might quite conceivably become a billionaire, if
they play their cards right.
Speaking of gambling, your other option is to sit down at the roulette table, put your
life savings on "black," and let it ride about 20 or 30 times.
Let us know how that goes.