This is what I mean when I keep mentioning exponential growth; I mean growth with a ski slope
shape that over a long period of time really takes off! $100 was deposited one time, and 50 years
later it grew to $14,727!
Look at the graph above. By year 30 your account has grown to about $2,000, so in year 30,
you’re getting 10.5% of $2000, in interest! Or about $210, as opposed to the only $10.50 in
interest you got in year 1, so now your money is growing at a really fast rate. It’s growing at a
rate of $210/year, as opposed to the $10.50/year rate it was growing at when you started out.
By year 50, your account has grown to about $14,000, so now you’re getting 10.5% of $14,000
as opposed to the 10.5% of only $100 you were getting when you started out. Now your money is
growing at a rate of 10.5% x $14,000 = $1,470/year as opposed to the $10.50/year rate it was
growing at when you started out!
In any case, whatever the mathematical intuition, the bottom line is the exponential growth from
compound interest, or return, means that if you’re willing to save and invest for the long run, you
can become very wealthy, and I encourage all of you to take advantage of this.
At this point, one thing that you should be thinking about is: “Every time I save $100, by not
buying something, or by buying it cheaper, that $100 could grow into over $14,000 in the long
run!” Imagine being able to save 20% of your take-home income – what would that grow into?
Let’s now look at that situation. Instead of saving $100 just one time, let’s see what would
happen if we saved about $100 per week, that is, approximately $400 per month. $400 is 20% of
$2000. So if you are following the 50-30-20 MoneyPlan and your monthly take-home income is
$2000, then you are saving $400 per month. The 10.5% interest rate, or return, we will be using,
remember, is approximately the historical average return on a balanced diversified stock
portfolio like the Wilshire 5000. Here are the results: