Check out this fun excerpt from my latest book for your reading enjoyment. I used to tell this story to 401(k) participants in enrollment meetings. It’s a real conversation I had with my dad in our garage in 1978! What do you think?
You can buy the book, Thoughts on Things Financial: Your Guide To A Chaotic Money World here or at most book retail outlets.
THE GREATEST STORY EVER TOLD (ABOUT MONEY)
Excerpt from the book Thoughts on Things Financial: Your Guide To A Chaotic Money World Copyright © 2020 Robert R. Schulz, CFP®
I think I was around 10 years old when my dad first talked to me about the magic of compounding interest. It really stuck with me, and its impact on me was a big reason why I became a financial advisor and planner. My dad had been a stockbroker with Smith Barney in the 60s and early 70s. By this time, he had moved on and was working for my granddad in the family newspaper business. Individual Retirement Accounts, or IRAs, had just come into existence, and he wanted me to open one for myself, at 10! I think the conversation started with that classic 10-year-old question, “Are we rich?” To which my dad had responded with the classic response, “Yes, we’re rich because we have all that we need, and we have each other.” That didn’t cut it for me, so from there I asked, “So we are millionaires?” Dad deftly dodged a direct response and said, “You know, son, if you want to be a millionaire, it’s easily within your reach. If you took $2,000 per year and invested it at a 6% return, by the time you were 65, you would have a million dollars.” “No way!” I said. He walked me through it on his old TI-30 calculator, where he had me take the initial $2,000 and multiply it by 1.06, then multiply the result again by the same number 55 times. That’s how I learned about compounding. Later I would learn that the equation we ran is exponential, and, on a graph, it’s not a straight line. Rather, it arcs or curves upward. The graph starts out with little curve to it. Then, as the asset value grows, the curve steepens.
Over years working with families as they save for retirement, I’ve learned that saving the first chunk of money is the tricky part. Any amount of money saved initially is crucial. Why? Because the magic of compounding has to start somewhere, or it doesn’t start at all. If it starts with $2,000 at age 10, we are well on our way. But let’s be real. Life is not a straight line where everything just works out nice and orderly. Dealing with the challenges of building a career and raising a family, along with the setbacks that are a part of everyone’s life experience, makes saving for retirement difficult, especially early on where it’s most important. We stop saving when we have kids because of the cost of daycare or the financial strain of going down to a single income. We stop saving when we bite off that big mortgage for a new home. We spend money from our 401(k) to relocate for new jobs.
For whatever reason, we tend to think of life as linear, graphically illustrated as a straight line. From a linear standpoint, these are not bad decisions. We think we can make it up by taking care of what needs to be done now and then buckling down later to get our long-term retirement savings handled. When we put off investing money toward our future, we don’t get that time back. That’s what my dad was trying to convey to me 40 years ago and something I passionately know that I want to convey to anyone who will listen. When you get to a certain age (and it’s a different age for different people), you finally start to really understand this finite time issue and how difficult it is to make up for lost time.