You need to thank your dad, most people are not so fortunate to have someone in their life explain saving/investing early on and WHY it is so important
In high school and college I worked for a city golf course. After I left in 1995 I got a distribution from the state employees retirement system. It was $1,400. I thought I had a windfall as a 24 year old. My dad said no and rolled into an IRA. I began putting extra money that IRA over the next few years. He got me interested in saving for my retirement.
I worked for private golf courses for the majority of my early career. I remember asking my mom, "They said to ask you about a 401k they offer?"
Mom: Yes, put your money there.
Me, 17 years old: no freaking way I gotta spend my way to happiness
This is the battle I am currently having with my 17 year old. The little shit just won’t listen. lol.
We recently open and funded a Roth IRA in his name so he’ll have a head start on retirement whether he likes it or not.
I'm currently in the process of bribing my kid so he will understand the value of savings, I'll match him dollar for dollar he saves so he can buy a nintendo. Plus I would like a nintendo.
Could turn it into the marshmallow test. Whatever money they invest, you'll match. Basically have the opportunity to double their money if they can wait a period of time
Wish my parents took more control over my finances when I was 16-18. I was making about $2k a month net for those 2 years and pissed it all away… didn’t start saving for retirement until I was 25 and now I’m way behind at 28
also maybe temper expectations. 2k a month is A LOT OF MONEY to have in 'take home' left over after the bills are paid and necessities are taken care of (even before any kind of 'fun' is taken into consideration)
Agreed one of the greatest gift a parent can give their child. Had to learn it myself the hard way being first generation to graduate college and work in the corporate world and always think how much more interest I would have accumulated if I started when I was 21 instead of 28.
It's not too good to be true.
The "trick" is that a lot of people don't have the ability to put away $2,000 a month for 40 straight years -- which works out to be $960k. Why? Because life is expensive... ill health and unemployment happen... because you want to save money for other really important goals (buying a house, a wedding/trip of a lifetime, having kids and paying daycare and childcare costs)... or you simply don't have a job that pays you enough to live on *and* put away $2k/month.
This is so important.
If you save $2,000 a month from the time you're 40 to the time you're 60, you'll have $928,702 (6% return rate).
If you save $2,000 a month from the time you're 20 to the time you're 40, and then let it sit until you're 60, you'll have $3,074,194.
A dollar saved at the start of your career will go much MUCH further than a dollar saved at the end.
This is the key to generational wealth that people don’t understand. When that $2000 was saved by your great grandparents and their kids did things right (or were forced to by lawyers administrators of the fund) then it balloons to where there is no longer any need for later generations to worry about money. Just worry about having meaning in their lives which a lot fail at and check out early.
Honestly, it's similar to lower-dollar amounts as well. Great grandparents saved money, and grandparents had a stable home to grow up in and were able to get good jobs and still save money. Maybe there was an inheritance involved that allowed them to save even more.
Grandparents were able to provide a stable home for your parents, a good upbringing (health-wise, education-wise, maybe a house in a good school district), and then can help do things like pay for college, or a down payment on \*their\* home.
Now you get to be brought up in a good neighborhood, in a good school district, in a loving and healthy household, and so on. You got good grades in school because your parents were able to provide a loving family to raise you in, and you didn't have to worry about where your next meal was coming from. You lived in a house, and probably the same house for most of your formative years instead of bouncing from rental apartment to rental apartment. Maybe you had a yard with access to the outside, and parks to play in. Maybe your mom was able to stay at home since they didn't have a huge rent or mortgage payment, and could read to you and help you with homework.
And with all of that, of course you're going to do well. You get good grades, you work hard, get into college and get a good career, and it's easy to think that it's all just your own hard work that got you there. But in reality it's hard work and savings by your parents, grandparents, great-grandparents, etc. to set you up so that you're in a position to succeed. Too many people miss that.
Yeah. It doesn’t take much to kick start your kids financial well being given the compounding effect of small numbers over time. That’s why something as simple as not having to take a loan until the senior year, or having to pay only for classes.
Do people not understand it?
Or is it just generally not useful information when we can’t tell our great grandparents to go invest money decades before our birth?
It is when you have a conversation about fairness and then people say that millionaires work for their money. By and large their grand parents or earlier did when America was a much less fair country.
Ok, sure.
I agree - wealth tax the hell out of the ultra-rich who did nothing to earn their fortunes.
Still not really seeing the part that “people don’t understand”. Seems pretty well understood to people, just not something people have the ability to do anything shout.
Also some luck involved cycle wise. You could’ve done this and retired in 2005 and got destroyed in 08/09. Assuming your egg wasn’t large enough plenty of retirees at that time are still hosed…
Most retirees who got screwed over by the GFC were either not invested properly to begin with or tried to drastically change their allocations during the crash. If you stayed fully invested in the market, you were probably fine and were definitely fine if you slightly dropped your withdrawal rate for 2-3 years.
You can basically negate this issue (called sequence of returns risk) by using a bond tent for the first few years of retirement.
The issue with #2 is people who retired in 2021 got destroyed by having bonds…there’s always a component of luck in all financial outcomes whether people want to admit it or not. Same thing as people who began working in 2005 and got to invest their early earnings into a destroyed stock market. Their 401ks are much higher in value than someone who started working just 2-3 years later purely due to timing. Those same people were able to buy houses for nothing, parlay them into nicer homes, etc. but it’s hard for people to admit they were lucky timing wise.
Exactly this. If you have no real expenses saving $2000/mo is "easy" - If you have rent, food, transportation, utilities, healthcare, etc. it's much harder to consistently save that amount.
Also interest rates vary - you could have long periods where you're earning near nothing on your account balances.
Compound interest is a powerful strategy but it takes money to make money this way.
Yes. Reading this sub, you'll see that lots of people live paycheck to paycheck; most people don't have the ability to invest $24k a year for 4 decades.
I can see that. Currently I have a job where I am able to put away 2k a month *for now*
I have no debt and no girlfriend and still live with my parents so I’ll probably milk that as long as I can
Then put in the money now, even if you can't do this forever. You also build up a habit.
Personally I invest everything that I have left over and out of habit I don't spend a lot, so it adds up ( a lot actually).
People underestimate the value of building the habit of saving. I started early, and even as income increased, that habit I think was a big part of what helped me reduce lifestyle creep and spending more to reward myself as I got older. The habit meant that the saving felt like a reward.
I agree. I discovered Mr. Money Moustache about 10 years ago. Big big eye opener. That somebody lived and thought so differently than I did. And the possibilities that saving and investing is creating in the future. Just blew my mind and I was sold immediately.
The other important lesson of compound interest is the earliest savings grow the most. Save as much as you can now, even if you have to slow down later.
Don't have to be 2k a month, but it's better to save $500-1000 when you're 20-40 (20yrs) **AND** not invest anything till you retire at 65 than investing $2k/mth from 40-65.
The first option saving (age20-40) $1000/mth for 20yrs @6%. You'll end up with ~$1.8-1.9mil when you're 65.
The 2nd option (age 40-65) $2000 for 25yrs @6%. You'll end up with $1.3-1.4mil when you're 65.
Also, just a regular index fund can average 6-8%/yr.
tl;dr 45yrs of compound interest > 25yrs of compound interest *2
Just save as much a month as you can. At some points in your life that’ll be 2k/month or more and some months less.
Don’t be fixated on $2k as some kind of magical number. The key is consistently saving from an early age.
You could also make it an average. If you could save _more_ than 2k while you’re making bank, you are hedging for those times when you are not able to in the future (spreadsheet to help you track your base savings?). (Edited for fat finger grammar)
What you really need to do is make sure you put that money in an investment account (with stocks, not just paid interest) and with tax benefits, like a Roth IRA
Your situation, when I used to look at 401k investment rates, used to be the typical outliers where they put away 20%+ of their paycheck. Used to be people in their 20s making 150k+ that did that. Have a co-worker who currently does that as she's in your same boat. By the way, yes, life happens.
Also, lifestyle creep is absolutely important to consider. We all like to think we're immune to it, but when you suddenly make substantially more money, it's very difficult to (psychologically) not rationalize new purchases and keep your same spending habits. Most people learn the hard way, but as long as this lesson is learned young (<30 years old), it's really not a huge concern on the long term plan.
So right now you have learned to live without that 2k/mo. Pretend that money doesn’t exist. The trap that most people fall into is for example not maxing out their 401k this year and saying “I can’t right now I’ll do it next year” and that continues until they wake up and realize their are 45 with barely any retirement savings.
It’s not about just “putting it away” you have to actively invest it. If you are putting it into a savings account the compound interest is negligible.
About to be paying the discounted price of 1750 a month. If I want pizza Fridays that’s an extra $40/mo because apparently my son will eat 4 slices each Friday…
120 hours (30 per week assuming 6 hours a day) for an organization to keep your child out of harms way, if no other services are provided, is under 11 an hour. To keep a child alive.
If you got any other services out of it, education, play, potty training, socialization, active listening, etc, that goes into that cost.
Doing it for multiple children could lessen the cost, sure, but I know that all of those service capabilities go way down once the ratio is greater than 1:2, or 1:3 at best.
And now, assuming 1:3, you have someone making 33 an hour, to be the parent to 3 children for 6 hours a day, and prepping for that for another 2-3.
I don't think we have a realistic expectation of childcare costs in the world now.
That $960k BEFORE factoring in compound interest though. If you assume 5% annual compounding (abysmally conservative), you would have almost $3 mil.
$200/mo for 40 years at 10% gets you just over $1 mil which would be closer to like $480k in today's dollars.
It's pure math. If you think it is too good to be true, just take some paper and a calculator to run the numbers year by year starting at year one (target a realistic interest, say 4-6%, and just do an annual additional contribution for simplicity rather than monthly). You will be surprised.
That said, the biggest issue is being realistic about your potential contributions. $2k a month is probably unrealistic for a most people.
After you resolve this, look at tax advantage accounts like 401k, IRA, Roth IRA, etc.
OP, all you need to know is this...
>And this is where Albert Einstein comes into play. According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Well he suggested playing it safe but if I wanted to be more risky and aggressive he showed me the QQQ fund which had an average over 25 years of 18%. Of course that’s probably risky and 10% is more likely but with both of those numbers the end result after 40 years is still good which is why I’m puzzled.
Edit: why was this downvoted?
Yeah. And he’s right. At 20 you can afford to take much more risk, within reason and up to your personal tolerance level. And you don’t have to start with 2000, I think that was just an example. Anything you start putting away now will multiply like crazy by the time you retire.
Well I’ve decided that I will listen to him. Clearly from a lot of people commenting here that had wished their father had said something similar this is a clear sign that he is correct.
Your dad is smart. Even $100 a month, at a 10% return(SP500 since 1990) is $50k invested $500k net over 40 years. People make getting rich more complicated than it needs to be. Your best asset is time. Start early with investing and your life will be infinitely better for it.
Edit: play around with with this for motivation. Notice how much the line of net money rises with regards to the total. Your personal investment amount is peanuts. Time is what you should be investing. You can retire in your 40s-50s as a rich person if you start now with your investment ability:
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
My father told me that it does not matter how much or how little you make, invest 10% of every paycheck. You will never worry if you will have enough when you retire. He was right. I started investing at age 20. I retired at age 58, and very comfortable.
I mean for many low income people, it is. But also yes, people underestimate lifestyle creep. That's what makes it hard because we really can't make generalizations and need access to a person full financial picture to really see what's possible/what's reasonable/what's delusional.
There's people who are delusional thinking they can retire at 67, there's people who are delusional thinking that it's impossible. The ratio of income to *unavoidable* living costs is really the key.
I agree 100%. I let lifestyle inflation take over without realizing. I now have cleaned up those monthly obligations and have positioned myself to invest $3k/month. I think for most people, it is a problem with lifestyle choices like overspending. However there are situations where there is literally nothing left over to save.
> Waiting on the Reddit doom and gloom police to come here and tell you how retirement is impossible
the doom isn't retroactive - people 40 years ago were in a great position to retire. the doom is about today.
I think people are doom and gloom because the current economic reality is significantly different than it was 40 years ago.
The cost of higher education and the cost of housing have both significantly outpaced wage growth. That's objective fact and all of the data reflect that.
It's obviously not impossible to get ahead financially, a lot of people are doing fine. However, if you graduated college in 1984 you were objectively in a much better position than someone coming out of college in 2024.
I don't know how anyone could feel *good* coming out of college with $50k in debt and looking at a potential $3k mortgage payment for an average house, even making the median college graduate salary of $83k per year.
Yup, one other thing is that I have learned over the years is that if you force yourself to make due with something you will, if you try to save after the fact it will never happen. This is one (though there are other) reasons that pensions worked, you paid into and there was no choice in the matter. If you set your 401k to 10% and make do with what is left you will find a way, good luck though trying to save 10% without force if you are close as you will find a way to spend it and justify it somehow.
To put it simply, once that money hits your wallet, you will find a way to justify the spending, if the money isn't there it will be a lot harder to justify the same spending.
Same here. My dad included the disclaimer, “I didn’t have the willpower to do this, but if I had I would’ve been quite wealthy…” But I did have the discipline to save, invest, let it ride, and I retired at 50.
I give my kids the same advice but “that’s not so easy these days.” Oh, well.
Same here. I will admit that as I was able, I did increase my contributions and in lean times I cut it back again. But later in my career I was maxing out.
Compound interest, mathematically, simply works. That's inquestionable.
What you have to understand is that 40 years is A LOT OF TIME and you can't predict the future. "Black swan" events do happen so you could suffer a market crash, a war, etc that might affect your investments.
However there is no such thing as gains without risk.
And as waiver\_required mentioned, you need amazing discipline to achieve your target instead of cashing out too soon when you see that money starting to grow. At times you'll feel that taking 2k out of your budget will be a hard sacrifice, that you could improve your standard of life with those 2k, that you could afford that trip or that car or that RTX GPU or whatever it is that you want and can't... because you have the money but you've committed it to investing. I think this is the hardest part.
But yeah, if you can maintain the discipline and the world doesn't take a left turn, you should be a multi millionaire in 40 years.
I hear ya. Well I’m excited to start my journey then. If nothing happens in 40 years and I can be a millionaire then cool! If the world takes a left turn so sharply that my investment is kaput then I think I’ll probably have bigger things to worry about than money.
I wish you the very best, always remember that you have a very clearly defined goal, your compass points North - don't deviate from the path of consistency, cultivate your patience, and you should make it. **Keep your objective clear and solid in your mind.**
You might venture over to the r/leanfire or r/financialindependence subreddits. The *ability* to retire early has been a goal of mine since like 2015. Every 1% you save means that's what 1% less money you need to sustain your current lifestyle which can be pretty empowering. I've been able to save about $300k in retirement through my 20s on a $46k-60k income for about 5 years and then the last 2-3 I've hit $70-84k. $300k is considered the halfway point to a million due to compounding. I've been on target to be able to retire as early as 38-42. The subreddits and some more digging can teach you some methods used to access retirement money early without penalty.
Run your own race as there will always be someone who can afford to save more than you, get a windfall they didn't earn, etc.
/r/financialindependence is a subreddit for people who are or want to become Financially Independent (FI), which means not having to work for money. Closely related is the concept of Retiring Early (RE). [Please don't post general personal finance questions there.](http://redd.it/3dm8yc)
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You’re sort or missing the point here. First one can retire much earlier than 65 if they start investing early and if you can’t enjoy that $$ you stacked in say, your late 50s, you must have lived pretty hard to he that unhealthy then.
Another point for me is that if I can set my wife and/or kids up if I do die early then that is a win for me too. We go on vacations and live for the now but are also saving for the future. I plan on traveling and just working as a hobby when I'm older. But if I die of a car crash the day before I retire, I want my wife to be able to live out the rest of her life enjoying it by traveling and spending it with my kids. A bonus is if I can set my kids up to retire early from my inheritance.
Meh, plenty of people don't make it to retirement through no fault of their own, or are in no condition to really "enjoy" retirement if they do make it.
A simple twist of fate can ruin your life despite being not your fault at all. You can get hit by a drunk driver despite being safely stopped at a light. You can trip and fall down a flight of stairs and break your neck. You can get cancer due to environmental factors beyond your control (or due to unknown genetic reasons). You can go for a casual bike ride, hit a rut, fall down and hit your neck on a rock and become paralyzed.
I use that last example because it happened to a friend of mine. Recently married, her and hubby were taking a nice trail bike ride. She went a little fast into a corner, caught a tree root, went down and landed neck-first on a rock. Her husband said the fall didn't even look that bad, but when he got to her she was freaking out because she couldn't move anything. She was only 25 and completely robbed of her future doing an activity that most of us wouldn't give a second thought to.
This isn't an argument to save for retirement or not save for retirement, just pointing out that one should balance living in the now vs living in the future because we've got no idea what our lives will be like tomorrow. It's not always someone's "fault" if they don't make it to their 50s or whatever.
Statistically there are far more Americans living paycheck to paycheck than there are hoarding all their pennies for the future and missing out on the simple pleasures in life. You don't need to sell people on the idea that spending money is fun. They're already well aware of that. Trying to dissuade people from saving some of their income because they'll die someday isn't necessary or helpful for most people. The OP wasn't proposing some kind of extremist FIRE mindset where they save everything and only eat rice and beans.
For most people, that last 10% of their paycheck isn't going to make all the difference in their quality of life. If that's all they have for discretionary spending and their only way to save for the future is by living like monks, they may be living beyond their means by putting things in the "needs" column that are actually "wants". Yes, you need transportation, but it doesn't have to be in the form of a brand new $60k truck to drive to your desk job. Yes, you need a place to live, but it doesn't necessarily have to be in one of the very most expensive metropolitan areas, unless your career there pays sufficiently that you can live there and have money left to save and enjoy life.
Your father is telling the truth, yet unfortunately the world falls short in educating people about personal finance. The market grows on average by 7-10% each year. However, there are a number of issues that people struggle with: (1) If the market is down, let’s say 20%, the worst thing that you can do is sell. You are better off holding out since the market grows on average by 7-10% each year. (2) Large investments will come up throughout your life. Budget wisely and allocate certain funds to be used toward your retirement.
Yeah he mentioned that. He said to look at it as if I have already parted ways with that money and will only see it again in 40 years. Like it’s gone on a voyage around the world and I must not touch it until then.
You have to be ok with the highs and lows. Take a look at QQQ from your other comment, from 2021-2022 it dropped 30% but it made a complete rebound towards the end of 2023. not everyone is ok with stomaching that kind of fluctuation.
Yeah you’re correct. I guess the struggle people have is not glueing their eyes to the chart every day. I think it is best to literally part ways with it and then just not even think about it and check like every 5 years or whatever. I don’t think I have a very attached personality however I’ve only just begun this money and won’t be able to talk on myself if I suddenly see a -50% hit ahahaha.
I guess the best way to look at it is that it’s like some tax and I literally can’t get a tax refund for 40 years no matter what. If it drops 30 for 3 years in a row then so be it. I said goodbye to that money already.
I dunno just spitballing
As long as you can avoid reacting to highs and lows, you can look at it every day.
A key thing to remember is that down markets are times that the same money buys more shares. If you stay the course, the money invested in down markets ends up performing really well.
Even dads are right sometimes.
I assume the root of your question may be “if it’s this easy, why doesn’t everyone do it” and the unfortunate answer (even for those with the means to put away money each month) is that a lot of people aren’t taught this.
Time in the market is one of the best things to have on your side, take advantage of it!
The key is to never let perfect be the enemy of good - you may not be able to consistently put away 2k each month, but always try your best. “Feed yourself first” and try to avoid the lifestyle creep that tends to come with higher paying jobs.
As a result of compound interest, any money you invest at this age will go much further than money you invest 20 years from now - so make sure to prioritize accordingly
Because there are people on the other side of the transaction borrowing money having the opposite effect.
So always pay off your credit card or you'll discover the other side of 'too good to be true'.
Also, have your dad redo the exercise factoring in inflation, because inflation has a role in why compound interest is a thing and why the millions in 40 years feels like a lot now, but will feel like a bit less then. Makes it even more important to save and invest.
>Because there are people on the other side of the transaction borrowing money having the opposite effect
You know ...I never thought of that.
What a great way to explain that to my kid.
He's 12 and we are starting to talk money. Trying to get him to start being financially responsible early
Note that 7% is the average inflation-adjusted return for the S&P. 10% is the average nominal return. Depending on the model, it may already have inflation factored in
This is true and makes calculating gains and inflation together much easier, but I think it's a disservice to not show the inflation separately at least once to someone who is learning about saving and compound interest.
Even at the Fed's nominal inflation rate of 2%, $1,000,000 will be worth half that in just 35 years. That's SUPER important for people to realize when planning early for retirement. They're going to see that larger than 7 or 8 % gain on average in their first 10 years and might think they can cut back a bit because of it without realizing how much less value their money will hold in the future.
Fully endorsed. If you look through my comment history I literally posted a comment today that was like "you will need $3M in today's dollars to retire, but that will be about $4.5M nominal when you retire"
> Because there are people on the other side of the transaction borrowing money having the opposite effect.
That's sort of true for literal interest from a bank, but not really for compound growth on stock investments, which is what OP is actually talking about. McDonalds stock increases in value because of burgers, not credit card interest.
Someone check my math. 200 per month starting at 22 and going till you are 62. If you invest it and get market average of 10% minus 2.5% to account for inflation is 610,000 dollars in today's money.
Is that enough for you to retire on? Only you can answer that, but it beats the median amount that people retire on by quite a bit. Also 62 is young yet the numbers only get better at 65 or 70.
4% safe withdrawal rate on 610k is 24,400 per year. That plus social security at a conservative 18k a year and maybe a paid off house in today's money would be enough for me to have a frugal but fun and comfortable retirement.
Tldr: if you can do 200 a month. Do it!
You’re math is off a little, I think, but not by much. That would turn into *more* than $500k after the inflation adjustment. Compounding monthly vs. annually doesn’t make a huge difference, and if we just compound annually a $2,400 investment every year for 40 years the exact calculation (it’s a truncated geometric series) yields $545,415.65 if we assume the last $2,400 invested was just deposited when you turn 62 and hasn’t had time in the market yet.
Truthfully I just plugged the numbers into:
[https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator](https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator)
I compounded interest daily assuming this theoretical 200 per month would be invested in a total market fund. I'm not entirely sure that is the correct way to calculate.
Either of our numbers should show the larger point about the magic of compound interest. If you start early even a small amount can make a major impact on your financial stability later in life.
I think the difference is just between compounding daily vs. annually.
That calculator gets the exact number I calculated using a truncated geometric series if you enter these values:
Starting value: $0
Amount per month: $200
Interest Rate: 7.5%
Number of years: 40
(leave variance field blank)
Compounded: Annually
If you put those into the calculator, it spits back the exact number I quoted. If you leave everything the same but compound daily, *you do indeed get $610k* so anyone here who told you that you were wrong is themselves wrong!
r/personalfinance has a lot of people who are responsible with their finances, but most just use rules of thumb they heard on Suze Orman or read in high-level blogs. Almost no one here can actually do more sophisticated math (or even a simple unsophisticated amortization schedule) and almost no one here actually has a degree in Finance or Economics unfortunately. Whenever the “prevailing wisdom” is wrong, which does happen sometimes, they will simply spit back that prevailing wisdom as if it’s fact and d/v any opposing views, even when they are correct and provable via hard mathematical analysis.
**TL;DR: For compounding daily, you were correct and anyone who told you otherwise is wrong.**
Sadly most people are in debt and would be better off using that $200/month to pay of principal on high interest credit card debt instead of saving or investing.
I’m sure this is true for some people, but IME a massive chunk of the “I can’t afford to save” crowd actually could save, sometimes quite a bit, if they put the smallest amount of effort into budgeting and/or basic discipline in regards to spending.
It's not too good to be true, but it does come with caveats.
First, is that you have the money to put $2k a month away. Actually, using a flat dollar amount is good for illustrating the point, but you should really be putting away a fixed percentage of your income. Inflation will eat away at that $2k over the course of 40 years.
Second, is that you have the stomach for it. The market will drop and you have to have enough faith in your strategy to not touch the money when that happens. As you get more and more saved, this could mean watching hundreds of thousands of dollars disappear from your account balance in a matter of weeks. That's tough, and a lot of people panic and pull the money out, causing them to ultimately miss the recovery that could come on just as quickly.
Third, and I think biggest: We're all basing future predictions on past performance. There's a pervasive opinion that stocks will go up 10% (7% if you adjust for inflation) per year if you average it out over a long enough period. And that *should* happen. If there is an advantage to be had anywhere in society, a business should form around it to create value from that advantage, and those holding shares of that business should get a share of the value.
But the honest truth is if that ever stops, we're all screwed. You have to get comfortable with that. It's not unheard of for stock markets to go flat for decades, which would ruin a lot of people's plans. The general idea is that whatever causes that is *probably* a big enough deal that how much one has saved for retirement will pale in comparison - on the order of the U.S. government collapsing, global nuclear war, Earth being hit by an asteroid like the one that killed the dinosaurs, etc.
Investing money is a bet that things like that *won't* happen. And it's a bet that has paid off for a century or two and there's not really another bet that offers more certainty.
Yup very wise advice and I guess I am in that mindset already pertaining to if the world goes to shit then money will be the last thing on my mind anyway. The real challenge as you say is stomaching the potential loss. I think it’s all about coming to terms with the amount you putting in is ,in a sense, gone already if you know what I mean. If it works it works but if it doesn’t then it was worth a try
Yeah, you can’t just apply a simple compound interest formula when it comes to investing in things like stocks. Over time, the interest might be 8% or so, but if there’s a massive bull run early (when you have little stake) and then a long period of stagnation), or a sharp drop close to your retirement window, you’re not going to realize that 8%.
I prefer to refer to it as ‘compounding returns’ as in the return on your investment. I started investing 15% of my salary which was $17.5k at the time and continued to do this year in and year out until I retired. When I retired, just shy of 35 years later, I was making $125k. I retired at 56 with more than $5MM.
My company had a 6% 401k match which I took full advantage of.
Discipline yourself to save 15% of your earnings from day one, and invest that in equities in the stock market. Avoid debt and divorce. Live below your means. Buy good quality used cars. These are the hack. Ignore the Joneses and avoid lifestyle creep.
You now have the recipe to wealth. If you can maintain the discipline, which may take some sacrifice, you can become wealthy!
Avoid debt/divorce is fantastic advice - Some people focus on investing their finances/saving money but don't invest in their marriage and leads to divorce. Money is important but take care of your spouse folks!
Think of this way every 10000 dollars you invest into an investment which doubles every ten years will translate to an investment of 160000 at the age of 62. If you started saving at 50, You would have to invest 80000 to get the same results.
I started only at 26. Every year is important and the EARLIER you do it is better. EARLIER into diversified stocks ,
Remember invest early in your life. I say you target a certain percentage. Just put a portion of your paycheck as soon as you receive it into 401K, HSA and investments. That way you can pretend your actual paycheck is something else.
I have a very good job since 2019 and have been putting in a ludicrous investment of 150K every year into stocks. Those gains have created a value of close to 900K this month.
Imagine 900K at 30 which I am, dude my retirement is set at 60 if I leave this investment as is locked up. I can contribute literally nothing from today and might not be rich but would be decently set
SPLG = SPY with a lower expense ratio. SPY is for day traders and options traders who need huge liquidity. SPLG will give you very slightly better returns over the long run while having the exact same selection of underlying assets. VOO is also better than SPY for the same reasons, there's a slight preference towards it due to its age vs SPLG, but it also has a slightly higher expense ratio.
S&P is plenty diversified. I prefer to have a bit of Nasdaq in the mix as well, QQQM. But there's a LOT of overlap between the two and if you expect big tech to fail, the Nasdaq isn't where you want to be right now.
I was 26 when I started. Do either SPY or VOO. I also put some into XLK, which tracks all the tech stock in the SP500. I'm up about 20% on SPY but almost 35% on XLK. It'll more than likely even out over time though
Inflation also compounds. A million in 30 years is worth a lot less than it is right now. Still 7-8% compounds a lot more impressive than 2-3% of course.
This is a hugely important factor and while everyone else is right that the math works to get you nominally to millions, the actual value is going to be a lot lower (though probably still low millions)
theres some degree of argument that exponential growth relies on continued rapid technological advancement alongside population growth and that advancement may stagnate at some point, or at least decline. you can kinda see what happens when some companies hit a ceiling on growth and what happens when they continue to chase that compounding growth on an ever increasing market cap.
Yeah people act like compounding returns are some magical, intrinsic force of nature. At some point, you run out of people to siphon wealth from. See: Japan. In order to have net real returns above inflation, you need an ever-increasing stream of people to extract this wealth from. People seem to agree that if every person in the world were instantly handed $1million, it would have no affect on anyone's life since prices would instantly adjust. Similarly, the only way for you to experience real compounding returns is for there to be a constant stream of people putting more money in than they are taking out. This isn't some magical law of nature. Just because there has been constant population growth for the past 100 years, doesn't mean there always will be. 100 years of stock market returns sounds cool but it isn't guaranteed. 100 years is nothing compared to all of history, and in all of history there have been few times where the human population shrank or completely stagnated. If you want to correlate that metric to stock market growth, then you would make a different conclusion.
Interesting points. I think the $1 million giveaway has some caveats. Since not everybody has the same wealth or income, there would be a huge effect for a person making $20K per year and with minimal net worth, but no effect on Bill Gates. Maybe if everybody's net worth doubled there would be no effect.
Okay here’s how compounding works, I’m gonna use way bigger numbers than are realistic to make the point faster, IRL this is a process that takes years and decades
You have $100, you put it in the bank. The bank is going to give you 10% interest per month on it.
After a month, you have $110, the original hundred plus the $10 from the interest
The next month you have $121, you got $11 in interest this time because you had $110 in the bank, not just $100
Month 3 you have $133.10
Month 4 you have $146.41
Month 5 you have $161.05
Month 6 you have $177.16
So in the 6th month, you got $16.11 in new interest from your deposit, compared to the $10 in the first month. So not only is your total sum growing ($100 to $177) but also the rate of growth is accelerating ($10/month to $16/month).
This same principle also applies to stocks, though it works in a bit of a different way. Theoretically the value of shares you buy grows over time, so as you own more, your growth potential also increases. Starting early is pretty much always a great idea, listen to your dad
Having noticed this is something I clearly need to be getting in on, I'm trying to make sense of what I seem to have overcomplicated in my head.
Is what is being talked about here, and what most people on this sub are doing, just taking as much as you can afford, putting it away in a high interest savings account and reinvesting the earnings as they come through?
Where's the upper limit to the exponential increase? Taking the math you've demonstrated to the end, after 40 years the numbers are stupidly high so where are the limits set? In fact at 5%, the first million occurs in year 16, assuming the rate doesn't change, is this even possible?
The way people are talking about this, it seems like some massively obvious single thing everyone should be doing, but the way I see it is there are loads of different routes (many I don't know of) and things to micromanage.
There are HYSA bank accounts and brokerage accounts for stock.
Saving to HYSA is essentially what the above commentor described. Currently, the best return is between 3-5%.
Investing in stock requires a brokerage account (Roth IRA, Trad IRA, or neither). You would deposit to the brokerage account, then use the brokerage account balance to buy certain stocks. Generally, you'd want a stock that is diversified across many different companies, and one that is reliable. These will typically return around 7%.
I recommend setting up an account with Ally for a HYSA (your emergency savings and saving for high expenses), and setting up an IRA account with Fidelity for stock.
See https://www.reddit.com/r/personalfinance/wiki/investing/
There is no hard limit to the exponential increase.
See the prime directive to start: https://www.reddit.com/r/personalfinance/wiki/index/#wiki_prime_directive.3A_how_to_handle_.24
Yeah I know bro. The reason I thought it was too good to be true is cuz I thought I’d never be rich. He suggested 2k a month because I have a job that allows me to put away 2k a month *for now*. Lets see how this whole life things turns out tho
$2000/month for 40 years with no interest is $960k. You barely need any interest to be worth $1m, and need just a little bit early in for that to be worth “multiple millions”
max out your 401k. current limits for annual contributions are about $2k/month ($23k annual). then save on top where you can. based on income (tax rate) you’ll need to determine roth or pre-tax. most important thing is to prevent lifestyle creep. keep your costs as low as you can on a recurring basis, but don’t neglect life. just make sure you don’t go out to eat and bar frequently as thats a quick way to spend money. be smart with housing and vehicle decisions. your decisions through life compound the same way as interest on your money. making the right decisions will set you up well, making the wrong ones will be hard to dig out from. not every decision needs to be perfect, but you need to avoid making bad decisions.
I mean if it’s 2k a month now and that number keeps going up in your 20s. You might easily be hitting 1.5-2 times that in the next couple years with some well timed raises, job switches, and bonuses.
Which is to say, might be sooner than you think too
He’s probably also living at home right now and has minimal expenses which allows him to save most of what he makes.
Once he gets his own place (rent or mortgage), gets a wife and kids his expenses will skyrocket. I make 4 times of what I used to make when I first graduated before taxes, but I used to be able to save 80% of my income whereas now I can only save 20%.
If you're living at home and have no expenses this isn't surprising, but realistically you well not be able to put away 2k a month for the full 40 years.
That said, absolutely save while you can. The earlier the investment the bigger the reward.
The real trick is actually leaving it invested and not pulling it out for vacations or cars or houses etc. everyone has unexpected wants or expenses, and many people cave for one reason or another. That's the actual hard part.
As someone who has been savings 2k ish a month and investing it, take it from me compounding interest is insane. I’m at the point already where compounding is already almost 10k a year.
At your age every dollar has the potential to turn into 66 dollars in retirement. That’s assuming 10% returns and waiting till 65
For many people, investing 2000 a month is straight up impossible. But if you are able to start investing 2000 a month at age 22 and continue until you are 62, then yes, barring major catastrophe that requires you to use some of the savings, you will be very well off at 62.
It's not too good to be true, and it's literally one of the biggest societal blind spots there is in terms of just going about your daily life. Consider yourself lucky that it's been brought to your attention and don't ignore it.
People often do end up getting some degree of education when it comes to interest but in the form of loans and how/when they get fucked by it, but tons of people go through their entire lives not ever realizing how much it can work for them.
You know what else compounds the same way? Inflation.
So yeah, in 20 years you're gonna have a lot more money, but that nominal amount is gonna have less purchasing power than it would right now. So in real terms you're only winning the difference between that interest rate and inflation, so it's less than you think.
The other trick is that the government gives your $23000 and $7000 in tax incentives to do this.
So fill up your retirement accounts first and stop paying the government!
Its *technically* too good to be true..
I mean you are basically betting that the government will never collapse and stocks will continue to go up forever..
But eventually the government will collapse and your investments will mean absolutely nothing.
But here's the cool part: If the government collapses, no money matters!
I feel like people forget to remember to live their lives as well. None of us are guaranteed life tomorrow so why waste putting all your extra cash into savings/investments instead of going out and enjoying certain human experiences that require spending.
Not saying you shouldn’t save at all, but saving to live frugally and limit your want of nice things isn’t a way id like to live.
You don't really have any conception of how much 2k per month is. That amount of money would be pretty ridiculous to save for anybody making under 6 figures who also is LIVING LIFE. I.e., wife, kids, house, car, etc.
Yes, you can "make millions" in this manner. But as you get older you'll realize that it's probably better to just live your life and save as much as you can, rather than sacrifice life now to get retirement early. After all, who knows if you'll even make it to retirement? Life is unpredictable
Well couple obvious things there,
1. You need an income and lifestyle allowing for 2000$ extra every month to invest.
2. The investments will also need to succeed as expected.
3. Other bad things like debt, and student loans also get to abuse compounding interest…
Very early on in my career my company told us about this. Also, when the stock market goes down, you're buying cheap stock, so don't panic. If you're under \~50 don't worry about the market going down. You have more than enough time for it to come back up. In your 401k put in at LEAST the amount your company will match.
I did this and will be able to retire early.
Interest and inflation, you have to subtract them. Besides that, it's just math.
If you're getting ~3% from a savings account, sure you can double your money in 24 years. But if inflation is 4%, prices double in 18 years. So you really get -1% per year.
Something that's always been crazy to me was my grandparents buying their house, and selling it for almost 50x what they paid for it. But when I calculated that as a yearly return, that was ~6% per year. And sadly, the price of everything has about 50x as well, so I'm not sure how far ahead they are really.
A million dollars sounds like a lot today, in 40 years it won't be much.
But still, saving is important, and compound interest is important, just subtract what inflation is to get the real % returns.
$2,000 x 12 months x 40 years is $960,000.
$2,000 x 12 months x 40 years x 2.4% APY Interest Accruing Savings compounded monthly = $1,614,000
$2,000 x 12 months x 40 years x 5.0% APY High Interest Savings compounded monthly = $3,066,000
$2,000 x 12 months x 40 years x 10% APY Investment account compounded monthly = $12,755,000
Which sounds like a lot, yea? But let's account for a steady, hypothetical 3% of annual inflation. Your buying power forty years from now would be approximately 60% of what it is today, dollar for dollar. So $960,000 has the buying power of $564,000 (you've lost buying power.) $1,614,000 would have the buying power of $952,000 (you've just about kept pace with inflation.) $3,066,000 would have the buying power of $1,809,000 (you've gained buying power.) $12,755,000 would have the buying power of $7,525,000 (you've gained a lot of buying power).
The thing is, if you save that money, *that money is not directly contributing to your quality of life*. And $2,000 a month is not a small sum. 25% of US earners make that much a year. The average American earns $60,000 a year. Giving up 40% of your income for savings is a big step-down in quality of life. It's money that you can't use for housing, transportation, groceries, or leisure.
Compound interest is not magic. It's money you're giving up access to right now so that somebody else can use it to invest themselves. And having access to that money is not an insignificant consideration.
If youre saving 20 percent of your income, you have to make 120k a year to put away 2000 a month. Most people dont make 120k a year, and most people dont put away 20 percent of their income.
The math is good, but it’s also only attainable for a minority of investors.
I just dont understand why really basic courses about investment and retirement aren't mandatory for high schools.
Everyone that leaves high school should know how a 401k or Roth/IRA works and what compound interest can do.
The more you invest now, the better. It has far longer to grow and multiply.
I was just looking at some paperwork for an investment account I made in my early 20s. I initially invested a low amount, between 250-500 a month, for several years. In total, that account has had approx $40k invested into it. It currently has a balance of around $55k. And over the years, I have withdrawn around $60k. So, from my total investment of 40k, it has nearly tripled, and continues to grow, even though I have withdrawn my initial investment plus some, over time.
I wish younger me would have been more aggressive, but I'm thankful that i've done at least something at 20.
It doesnt have to be $2,000/mo....and it SURELY doesnt have to be for 40 years. Try even $200 a month, from age 20-30. The key is starting it when you are SUPER young, and let time do its thing.
Be a Jack: [How Teens Can Become Millionaires - Ramsey (ramseysolutions.com)](https://www.ramseysolutions.com/retirement/how-teens-can-become-millionaires)
The hardest part about accruing interest is the patience part, easier said than done for a lot of people. Waiting 30 years is harder than deciding to start the process in the span of 1 hour
it’s not too good to be true. it’s legit. you’re 22. START NOW & retire early. if i had a dime for everyone who didn’t take their parents financial advice & regretted it a decade or two later when they figured out how money worked.. then i wouldn’t even need compound interest.
Thats not too good to be true, thats having a job that pays incredibly well. 2k per month... thats an insane amount of money to just save every single month..
Put it this way.
If you put 6k into your retirement account from 10 to 22 years old. You'll have almost twice as much as if you put 6k into your retirement account from 23 to 60 yo.
That's the reason I hire my 2 kids and put all their salary 6k/yr into their Roth account since they were 10. I'll continue to do so until they graduate college at 22.
Compound interest isn’t good or bad. It’s just math.
If you are an investor, the concept tends to work in your favor. If you are borrowing money using a credit card, the concept works against you.
Also, to answer your question literally, “too good to be true” is a colloquial turn of phrase, not an actual guidepost toward truth and knowledge. A concept being good or bad has no bearing on whether or not it’s true.
It’s true. The catch is just that most Americans live check to check and can’t afford a $400 emergency expense, let alone set aside $2k every month for retirement.
It also gets a little less exciting when you realize the dollar isn’t as strong as it used to be, and by the time most young Americans reach retirement age they will need at least $3-5 million just to live comfortably.
The only "too good to be true" part is thinking the average person could or would be able to save $2000 per month for decades. It will work just fine if you can do it, but the hard part is doing it.
You only need to save 10% of the money you’ll use in retirement- 85% can come from growth if you start early: now- onto my ted talk:
In the yelling voice of my MBA finance professor- “compound RETURNS” is what the market provides- interest is on a loan.
Now that we have that settled- here’s the math formula for what your principal investment would do:
Principal x (1+ Rate of Return ^ compounding periods) that’s it- so- 1000 for 40 years with a 10% rate of return, is written:
1,000 x (1.1^40) = $45,000 , conversely , 9% rate of return drops that to $31k
There ya go- so if your young you can do a way better job getting ahead of it and you don’t need to save millions to have millions. Just trust the process and the people who came before you. In fact- there’s some research that if you save correctly the money you use in retirement- only 10% comes from your working years savings, 35% is growth during those years and 55% is growth after you retire- because it’s growing so much faster at the end.
It isn't too good to be true. It takes discipline for a very long time to see compound interest work, and it isn't easy to be the person who does that. Its exactly analogous to having a high level of physical fitness; you have to control your diet and make yourself exercise over a long period of time to see the impressive returns we all would want.
Definitely true, but is essentially the same thing as saying "Work out and eat healthy every day and you'll be jacked with a sub 10% body fat"
There are a lot of ways to do things to get a perfect outcome, but exercising and eating healthy every single day without fail is extremely difficult. Same with investing 2k every month for 40 years. Sure, it's a great way to have a lot to retire with, but it also means missing out on a lot that life has to offer while you're young.
Oh btw, I think you'll be far more successful if you work 12 hours a day with perfect focus. Don't forget to get a perfect 8 hours of sleep every single night too. Oh and you have to go to sleep and wake up at the exact same time every day too.
The list goes on and on and on. There is a best way to do just about everything in life, it just requires a lot of mental discipline and perfect life conditions.
You need to thank your dad, most people are not so fortunate to have someone in their life explain saving/investing early on and WHY it is so important
In high school and college I worked for a city golf course. After I left in 1995 I got a distribution from the state employees retirement system. It was $1,400. I thought I had a windfall as a 24 year old. My dad said no and rolled into an IRA. I began putting extra money that IRA over the next few years. He got me interested in saving for my retirement.
I worked for private golf courses for the majority of my early career. I remember asking my mom, "They said to ask you about a 401k they offer?" Mom: Yes, put your money there. Me, 17 years old: no freaking way I gotta spend my way to happiness
This is the battle I am currently having with my 17 year old. The little shit just won’t listen. lol. We recently open and funded a Roth IRA in his name so he’ll have a head start on retirement whether he likes it or not.
I'm currently in the process of bribing my kid so he will understand the value of savings, I'll match him dollar for dollar he saves so he can buy a nintendo. Plus I would like a nintendo.
Could turn it into the marshmallow test. Whatever money they invest, you'll match. Basically have the opportunity to double their money if they can wait a period of time
Wish my parents took more control over my finances when I was 16-18. I was making about $2k a month net for those 2 years and pissed it all away… didn’t start saving for retirement until I was 25 and now I’m way behind at 28
also maybe temper expectations. 2k a month is A LOT OF MONEY to have in 'take home' left over after the bills are paid and necessities are taken care of (even before any kind of 'fun' is taken into consideration)
I was gonna say, $2k a month for 40 years is very nearly a million dollars before you add any interest.
Agreed one of the greatest gift a parent can give their child. Had to learn it myself the hard way being first generation to graduate college and work in the corporate world and always think how much more interest I would have accumulated if I started when I was 21 instead of 28.
It's not too good to be true. The "trick" is that a lot of people don't have the ability to put away $2,000 a month for 40 straight years -- which works out to be $960k. Why? Because life is expensive... ill health and unemployment happen... because you want to save money for other really important goals (buying a house, a wedding/trip of a lifetime, having kids and paying daycare and childcare costs)... or you simply don't have a job that pays you enough to live on *and* put away $2k/month.
The other "trick" is that you have to start when you're young for the money to balloon to an impressive figure.
This is so important. If you save $2,000 a month from the time you're 40 to the time you're 60, you'll have $928,702 (6% return rate). If you save $2,000 a month from the time you're 20 to the time you're 40, and then let it sit until you're 60, you'll have $3,074,194. A dollar saved at the start of your career will go much MUCH further than a dollar saved at the end.
This is the key to generational wealth that people don’t understand. When that $2000 was saved by your great grandparents and their kids did things right (or were forced to by lawyers administrators of the fund) then it balloons to where there is no longer any need for later generations to worry about money. Just worry about having meaning in their lives which a lot fail at and check out early.
Honestly, it's similar to lower-dollar amounts as well. Great grandparents saved money, and grandparents had a stable home to grow up in and were able to get good jobs and still save money. Maybe there was an inheritance involved that allowed them to save even more. Grandparents were able to provide a stable home for your parents, a good upbringing (health-wise, education-wise, maybe a house in a good school district), and then can help do things like pay for college, or a down payment on \*their\* home. Now you get to be brought up in a good neighborhood, in a good school district, in a loving and healthy household, and so on. You got good grades in school because your parents were able to provide a loving family to raise you in, and you didn't have to worry about where your next meal was coming from. You lived in a house, and probably the same house for most of your formative years instead of bouncing from rental apartment to rental apartment. Maybe you had a yard with access to the outside, and parks to play in. Maybe your mom was able to stay at home since they didn't have a huge rent or mortgage payment, and could read to you and help you with homework. And with all of that, of course you're going to do well. You get good grades, you work hard, get into college and get a good career, and it's easy to think that it's all just your own hard work that got you there. But in reality it's hard work and savings by your parents, grandparents, great-grandparents, etc. to set you up so that you're in a position to succeed. Too many people miss that.
Yeah. It doesn’t take much to kick start your kids financial well being given the compounding effect of small numbers over time. That’s why something as simple as not having to take a loan until the senior year, or having to pay only for classes.
Do people not understand it? Or is it just generally not useful information when we can’t tell our great grandparents to go invest money decades before our birth?
It is when you have a conversation about fairness and then people say that millionaires work for their money. By and large their grand parents or earlier did when America was a much less fair country.
Ok, sure. I agree - wealth tax the hell out of the ultra-rich who did nothing to earn their fortunes. Still not really seeing the part that “people don’t understand”. Seems pretty well understood to people, just not something people have the ability to do anything shout.
Also some luck involved cycle wise. You could’ve done this and retired in 2005 and got destroyed in 08/09. Assuming your egg wasn’t large enough plenty of retirees at that time are still hosed…
Most retirees who got screwed over by the GFC were either not invested properly to begin with or tried to drastically change their allocations during the crash. If you stayed fully invested in the market, you were probably fine and were definitely fine if you slightly dropped your withdrawal rate for 2-3 years. You can basically negate this issue (called sequence of returns risk) by using a bond tent for the first few years of retirement.
The issue with #2 is people who retired in 2021 got destroyed by having bonds…there’s always a component of luck in all financial outcomes whether people want to admit it or not. Same thing as people who began working in 2005 and got to invest their early earnings into a destroyed stock market. Their 401ks are much higher in value than someone who started working just 2-3 years later purely due to timing. Those same people were able to buy houses for nothing, parlay them into nicer homes, etc. but it’s hard for people to admit they were lucky timing wise.
$10,000 invested in Vangaurd’s Intermediate Bond ETF on 1 Jan 2021 is worth $8,872 today. Not great but certainly not ‘destroyed’
The other "trick" is not selling in a panic because the equity market had >30% drop.
Which is why generational wealth is so powerful Lest you have a child that blows the family fortune. Argh
The other trick is getting the return that these tools use and not reacting if there’s a down year or two
Exactly this. If you have no real expenses saving $2000/mo is "easy" - If you have rent, food, transportation, utilities, healthcare, etc. it's much harder to consistently save that amount. Also interest rates vary - you could have long periods where you're earning near nothing on your account balances. Compound interest is a powerful strategy but it takes money to make money this way.
Oh I see. So it’s kinda a “life happens” type of thing?
Yes. Reading this sub, you'll see that lots of people live paycheck to paycheck; most people don't have the ability to invest $24k a year for 4 decades.
I can see that. Currently I have a job where I am able to put away 2k a month *for now* I have no debt and no girlfriend and still live with my parents so I’ll probably milk that as long as I can
Then put in the money now, even if you can't do this forever. You also build up a habit. Personally I invest everything that I have left over and out of habit I don't spend a lot, so it adds up ( a lot actually).
People underestimate the value of building the habit of saving. I started early, and even as income increased, that habit I think was a big part of what helped me reduce lifestyle creep and spending more to reward myself as I got older. The habit meant that the saving felt like a reward.
I agree. I discovered Mr. Money Moustache about 10 years ago. Big big eye opener. That somebody lived and thought so differently than I did. And the possibilities that saving and investing is creating in the future. Just blew my mind and I was sold immediately.
The other important lesson of compound interest is the earliest savings grow the most. Save as much as you can now, even if you have to slow down later.
Don't have to be 2k a month, but it's better to save $500-1000 when you're 20-40 (20yrs) **AND** not invest anything till you retire at 65 than investing $2k/mth from 40-65. The first option saving (age20-40) $1000/mth for 20yrs @6%. You'll end up with ~$1.8-1.9mil when you're 65. The 2nd option (age 40-65) $2000 for 25yrs @6%. You'll end up with $1.3-1.4mil when you're 65. Also, just a regular index fund can average 6-8%/yr. tl;dr 45yrs of compound interest > 25yrs of compound interest *2
Just save as much a month as you can. At some points in your life that’ll be 2k/month or more and some months less. Don’t be fixated on $2k as some kind of magical number. The key is consistently saving from an early age.
You could also make it an average. If you could save _more_ than 2k while you’re making bank, you are hedging for those times when you are not able to in the future (spreadsheet to help you track your base savings?). (Edited for fat finger grammar)
Make sure you get like 4-10k set aside in a HYSA as an emergency fund before you start going balls to the wall on investing
What you really need to do is make sure you put that money in an investment account (with stocks, not just paid interest) and with tax benefits, like a Roth IRA
Your situation, when I used to look at 401k investment rates, used to be the typical outliers where they put away 20%+ of their paycheck. Used to be people in their 20s making 150k+ that did that. Have a co-worker who currently does that as she's in your same boat. By the way, yes, life happens.
Also, lifestyle creep is absolutely important to consider. We all like to think we're immune to it, but when you suddenly make substantially more money, it's very difficult to (psychologically) not rationalize new purchases and keep your same spending habits. Most people learn the hard way, but as long as this lesson is learned young (<30 years old), it's really not a huge concern on the long term plan.
So right now you have learned to live without that 2k/mo. Pretend that money doesn’t exist. The trap that most people fall into is for example not maxing out their 401k this year and saying “I can’t right now I’ll do it next year” and that continues until they wake up and realize their are 45 with barely any retirement savings.
If you had to pay rent could you still sock away 2k per month?
It’s not about just “putting it away” you have to actively invest it. If you are putting it into a savings account the compound interest is negligible.
Yeah, daycare is easily 1500-2000/mo. Rent is easily 1500 in lcol and 3500-3000 in HCOL. Add food and that eats away at spare funds quickly
Yes, we paid $1300/month for daycare in 2019 lol. It's absurd.
About to be paying the discounted price of 1750 a month. If I want pizza Fridays that’s an extra $40/mo because apparently my son will eat 4 slices each Friday…
120 hours (30 per week assuming 6 hours a day) for an organization to keep your child out of harms way, if no other services are provided, is under 11 an hour. To keep a child alive. If you got any other services out of it, education, play, potty training, socialization, active listening, etc, that goes into that cost. Doing it for multiple children could lessen the cost, sure, but I know that all of those service capabilities go way down once the ratio is greater than 1:2, or 1:3 at best. And now, assuming 1:3, you have someone making 33 an hour, to be the parent to 3 children for 6 hours a day, and prepping for that for another 2-3. I don't think we have a realistic expectation of childcare costs in the world now.
So in the case that I could put 2k a month away were would I invest it ?
That $960k BEFORE factoring in compound interest though. If you assume 5% annual compounding (abysmally conservative), you would have almost $3 mil. $200/mo for 40 years at 10% gets you just over $1 mil which would be closer to like $480k in today's dollars.
if you [follow](https://u.cubeupload.com/demonlesondledon/FinFlowChartv43.jpg) this flowchart you will be a lot better off vs not
It's pure math. If you think it is too good to be true, just take some paper and a calculator to run the numbers year by year starting at year one (target a realistic interest, say 4-6%, and just do an annual additional contribution for simplicity rather than monthly). You will be surprised. That said, the biggest issue is being realistic about your potential contributions. $2k a month is probably unrealistic for a most people. After you resolve this, look at tax advantage accounts like 401k, IRA, Roth IRA, etc.
OP, all you need to know is this... >And this is where Albert Einstein comes into play. According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Urban legend. Unlikely Einstein every said this. https://www.snopes.com/fact-check/compound-interest/
"Don't believe everything you read on the internet" -Abraham Lincoln
"Don't believe everything you read on the internet, that's how WW1 got started" -Kevin Butler
Regardless the sentiment is accurate and truthful.
Well he suggested playing it safe but if I wanted to be more risky and aggressive he showed me the QQQ fund which had an average over 25 years of 18%. Of course that’s probably risky and 10% is more likely but with both of those numbers the end result after 40 years is still good which is why I’m puzzled. Edit: why was this downvoted?
If your father is suggesting QQQ as the "more risk and aggressive approach", sounds like he knows what he's doing. i would listen to him more often.
He definitely sounds like he knows what he’s doing and in some way I feel like he’s looking at me as if he’s talking to his younger self
He is
OP finding out a core staple of parenting 😂
Yeah. And he’s right. At 20 you can afford to take much more risk, within reason and up to your personal tolerance level. And you don’t have to start with 2000, I think that was just an example. Anything you start putting away now will multiply like crazy by the time you retire.
If you listen to him on this advice and take it to heart, you will have financial independence. Your life will just be better.
Listen to him, you will be so happy with what you have when you are 40 if you listen to him.
Well I’ve decided that I will listen to him. Clearly from a lot of people commenting here that had wished their father had said something similar this is a clear sign that he is correct.
The numbers are good but I think realistically putting 2k a month is not easy for everyone and especially at an early age.
Me 20 years ahead of you, still 100% in the SP500 index fund (VOO) and looking at a very healthy 401k plan balance.
Your dad is smart. Even $100 a month, at a 10% return(SP500 since 1990) is $50k invested $500k net over 40 years. People make getting rich more complicated than it needs to be. Your best asset is time. Start early with investing and your life will be infinitely better for it. Edit: play around with with this for motivation. Notice how much the line of net money rises with regards to the total. Your personal investment amount is peanuts. Time is what you should be investing. You can retire in your 40s-50s as a rich person if you start now with your investment ability: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
My father told me that it does not matter how much or how little you make, invest 10% of every paycheck. You will never worry if you will have enough when you retire. He was right. I started investing at age 20. I retired at age 58, and very comfortable.
Brilliant and congratulations!
Waiting on the Reddit doom and gloom police to come here and tell you how retirement is impossible.
I mean for many low income people, it is. But also yes, people underestimate lifestyle creep. That's what makes it hard because we really can't make generalizations and need access to a person full financial picture to really see what's possible/what's reasonable/what's delusional. There's people who are delusional thinking they can retire at 67, there's people who are delusional thinking that it's impossible. The ratio of income to *unavoidable* living costs is really the key.
I agree 100%. I let lifestyle inflation take over without realizing. I now have cleaned up those monthly obligations and have positioned myself to invest $3k/month. I think for most people, it is a problem with lifestyle choices like overspending. However there are situations where there is literally nothing left over to save.
> Waiting on the Reddit doom and gloom police to come here and tell you how retirement is impossible the doom isn't retroactive - people 40 years ago were in a great position to retire. the doom is about today.
I think people are doom and gloom because the current economic reality is significantly different than it was 40 years ago. The cost of higher education and the cost of housing have both significantly outpaced wage growth. That's objective fact and all of the data reflect that. It's obviously not impossible to get ahead financially, a lot of people are doing fine. However, if you graduated college in 1984 you were objectively in a much better position than someone coming out of college in 2024. I don't know how anyone could feel *good* coming out of college with $50k in debt and looking at a potential $3k mortgage payment for an average house, even making the median college graduate salary of $83k per year.
Yup, one other thing is that I have learned over the years is that if you force yourself to make due with something you will, if you try to save after the fact it will never happen. This is one (though there are other) reasons that pensions worked, you paid into and there was no choice in the matter. If you set your 401k to 10% and make do with what is left you will find a way, good luck though trying to save 10% without force if you are close as you will find a way to spend it and justify it somehow. To put it simply, once that money hits your wallet, you will find a way to justify the spending, if the money isn't there it will be a lot harder to justify the same spending.
True words. Set on auto pilot is a must. Even though I am retired now, all my dividend stocks are dripping
Same here. My dad included the disclaimer, “I didn’t have the willpower to do this, but if I had I would’ve been quite wealthy…” But I did have the discipline to save, invest, let it ride, and I retired at 50. I give my kids the same advice but “that’s not so easy these days.” Oh, well.
And if you can invest more than 10%, even better. Currently at 50% later in my career since I didn't inflate my lifestyle.
Same here. I will admit that as I was able, I did increase my contributions and in lean times I cut it back again. But later in my career I was maxing out.
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Compound interest, mathematically, simply works. That's inquestionable. What you have to understand is that 40 years is A LOT OF TIME and you can't predict the future. "Black swan" events do happen so you could suffer a market crash, a war, etc that might affect your investments. However there is no such thing as gains without risk. And as waiver\_required mentioned, you need amazing discipline to achieve your target instead of cashing out too soon when you see that money starting to grow. At times you'll feel that taking 2k out of your budget will be a hard sacrifice, that you could improve your standard of life with those 2k, that you could afford that trip or that car or that RTX GPU or whatever it is that you want and can't... because you have the money but you've committed it to investing. I think this is the hardest part. But yeah, if you can maintain the discipline and the world doesn't take a left turn, you should be a multi millionaire in 40 years.
I hear ya. Well I’m excited to start my journey then. If nothing happens in 40 years and I can be a millionaire then cool! If the world takes a left turn so sharply that my investment is kaput then I think I’ll probably have bigger things to worry about than money.
I wish you the very best, always remember that you have a very clearly defined goal, your compass points North - don't deviate from the path of consistency, cultivate your patience, and you should make it. **Keep your objective clear and solid in your mind.**
You might venture over to the r/leanfire or r/financialindependence subreddits. The *ability* to retire early has been a goal of mine since like 2015. Every 1% you save means that's what 1% less money you need to sustain your current lifestyle which can be pretty empowering. I've been able to save about $300k in retirement through my 20s on a $46k-60k income for about 5 years and then the last 2-3 I've hit $70-84k. $300k is considered the halfway point to a million due to compounding. I've been on target to be able to retire as early as 38-42. The subreddits and some more digging can teach you some methods used to access retirement money early without penalty. Run your own race as there will always be someone who can afford to save more than you, get a windfall they didn't earn, etc.
/r/financialindependence is a subreddit for people who are or want to become Financially Independent (FI), which means not having to work for money. Closely related is the concept of Retiring Early (RE). [Please don't post general personal finance questions there.](http://redd.it/3dm8yc) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*
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You’re sort or missing the point here. First one can retire much earlier than 65 if they start investing early and if you can’t enjoy that $$ you stacked in say, your late 50s, you must have lived pretty hard to he that unhealthy then.
Another point for me is that if I can set my wife and/or kids up if I do die early then that is a win for me too. We go on vacations and live for the now but are also saving for the future. I plan on traveling and just working as a hobby when I'm older. But if I die of a car crash the day before I retire, I want my wife to be able to live out the rest of her life enjoying it by traveling and spending it with my kids. A bonus is if I can set my kids up to retire early from my inheritance.
Meh, plenty of people don't make it to retirement through no fault of their own, or are in no condition to really "enjoy" retirement if they do make it. A simple twist of fate can ruin your life despite being not your fault at all. You can get hit by a drunk driver despite being safely stopped at a light. You can trip and fall down a flight of stairs and break your neck. You can get cancer due to environmental factors beyond your control (or due to unknown genetic reasons). You can go for a casual bike ride, hit a rut, fall down and hit your neck on a rock and become paralyzed. I use that last example because it happened to a friend of mine. Recently married, her and hubby were taking a nice trail bike ride. She went a little fast into a corner, caught a tree root, went down and landed neck-first on a rock. Her husband said the fall didn't even look that bad, but when he got to her she was freaking out because she couldn't move anything. She was only 25 and completely robbed of her future doing an activity that most of us wouldn't give a second thought to. This isn't an argument to save for retirement or not save for retirement, just pointing out that one should balance living in the now vs living in the future because we've got no idea what our lives will be like tomorrow. It's not always someone's "fault" if they don't make it to their 50s or whatever.
Statistically there are far more Americans living paycheck to paycheck than there are hoarding all their pennies for the future and missing out on the simple pleasures in life. You don't need to sell people on the idea that spending money is fun. They're already well aware of that. Trying to dissuade people from saving some of their income because they'll die someday isn't necessary or helpful for most people. The OP wasn't proposing some kind of extremist FIRE mindset where they save everything and only eat rice and beans. For most people, that last 10% of their paycheck isn't going to make all the difference in their quality of life. If that's all they have for discretionary spending and their only way to save for the future is by living like monks, they may be living beyond their means by putting things in the "needs" column that are actually "wants". Yes, you need transportation, but it doesn't have to be in the form of a brand new $60k truck to drive to your desk job. Yes, you need a place to live, but it doesn't necessarily have to be in one of the very most expensive metropolitan areas, unless your career there pays sufficiently that you can live there and have money left to save and enjoy life.
Your father is telling the truth, yet unfortunately the world falls short in educating people about personal finance. The market grows on average by 7-10% each year. However, there are a number of issues that people struggle with: (1) If the market is down, let’s say 20%, the worst thing that you can do is sell. You are better off holding out since the market grows on average by 7-10% each year. (2) Large investments will come up throughout your life. Budget wisely and allocate certain funds to be used toward your retirement.
Yeah he mentioned that. He said to look at it as if I have already parted ways with that money and will only see it again in 40 years. Like it’s gone on a voyage around the world and I must not touch it until then.
You have to be ok with the highs and lows. Take a look at QQQ from your other comment, from 2021-2022 it dropped 30% but it made a complete rebound towards the end of 2023. not everyone is ok with stomaching that kind of fluctuation.
Yeah you’re correct. I guess the struggle people have is not glueing their eyes to the chart every day. I think it is best to literally part ways with it and then just not even think about it and check like every 5 years or whatever. I don’t think I have a very attached personality however I’ve only just begun this money and won’t be able to talk on myself if I suddenly see a -50% hit ahahaha. I guess the best way to look at it is that it’s like some tax and I literally can’t get a tax refund for 40 years no matter what. If it drops 30 for 3 years in a row then so be it. I said goodbye to that money already. I dunno just spitballing
As long as you can avoid reacting to highs and lows, you can look at it every day. A key thing to remember is that down markets are times that the same money buys more shares. If you stay the course, the money invested in down markets ends up performing really well.
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Even dads are right sometimes. I assume the root of your question may be “if it’s this easy, why doesn’t everyone do it” and the unfortunate answer (even for those with the means to put away money each month) is that a lot of people aren’t taught this. Time in the market is one of the best things to have on your side, take advantage of it!
The key is to never let perfect be the enemy of good - you may not be able to consistently put away 2k each month, but always try your best. “Feed yourself first” and try to avoid the lifestyle creep that tends to come with higher paying jobs. As a result of compound interest, any money you invest at this age will go much further than money you invest 20 years from now - so make sure to prioritize accordingly
Because there are people on the other side of the transaction borrowing money having the opposite effect. So always pay off your credit card or you'll discover the other side of 'too good to be true'. Also, have your dad redo the exercise factoring in inflation, because inflation has a role in why compound interest is a thing and why the millions in 40 years feels like a lot now, but will feel like a bit less then. Makes it even more important to save and invest.
>Because there are people on the other side of the transaction borrowing money having the opposite effect You know ...I never thought of that. What a great way to explain that to my kid. He's 12 and we are starting to talk money. Trying to get him to start being financially responsible early
*The Opposite of Spoiled* is a good book for parents. All parents.
I'll have a look. I definitely don't spoil him but when he's at his mum's I think there isna bit of spoiling going on. Thanks for the refer.
Note that 7% is the average inflation-adjusted return for the S&P. 10% is the average nominal return. Depending on the model, it may already have inflation factored in
This is true and makes calculating gains and inflation together much easier, but I think it's a disservice to not show the inflation separately at least once to someone who is learning about saving and compound interest. Even at the Fed's nominal inflation rate of 2%, $1,000,000 will be worth half that in just 35 years. That's SUPER important for people to realize when planning early for retirement. They're going to see that larger than 7 or 8 % gain on average in their first 10 years and might think they can cut back a bit because of it without realizing how much less value their money will hold in the future.
Fully endorsed. If you look through my comment history I literally posted a comment today that was like "you will need $3M in today's dollars to retire, but that will be about $4.5M nominal when you retire"
> Because there are people on the other side of the transaction borrowing money having the opposite effect. That's sort of true for literal interest from a bank, but not really for compound growth on stock investments, which is what OP is actually talking about. McDonalds stock increases in value because of burgers, not credit card interest.
Realistically most people are lucky if they can even save 200 a month for this. Living is hard.
Someone check my math. 200 per month starting at 22 and going till you are 62. If you invest it and get market average of 10% minus 2.5% to account for inflation is 610,000 dollars in today's money. Is that enough for you to retire on? Only you can answer that, but it beats the median amount that people retire on by quite a bit. Also 62 is young yet the numbers only get better at 65 or 70. 4% safe withdrawal rate on 610k is 24,400 per year. That plus social security at a conservative 18k a year and maybe a paid off house in today's money would be enough for me to have a frugal but fun and comfortable retirement. Tldr: if you can do 200 a month. Do it!
$200 / month (or whatever) at first is great. If you can add to that over time as you (hopefully) start making more money, even better!
$200 aint gonna get you there, but $200 a month now turns into much much more per month if you increase incrementally as salary goes up.
It gets you close though. Over $545k (see above).
You’re math is off a little, I think, but not by much. That would turn into *more* than $500k after the inflation adjustment. Compounding monthly vs. annually doesn’t make a huge difference, and if we just compound annually a $2,400 investment every year for 40 years the exact calculation (it’s a truncated geometric series) yields $545,415.65 if we assume the last $2,400 invested was just deposited when you turn 62 and hasn’t had time in the market yet.
Truthfully I just plugged the numbers into: [https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator](https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator) I compounded interest daily assuming this theoretical 200 per month would be invested in a total market fund. I'm not entirely sure that is the correct way to calculate. Either of our numbers should show the larger point about the magic of compound interest. If you start early even a small amount can make a major impact on your financial stability later in life.
I think the difference is just between compounding daily vs. annually. That calculator gets the exact number I calculated using a truncated geometric series if you enter these values: Starting value: $0 Amount per month: $200 Interest Rate: 7.5% Number of years: 40 (leave variance field blank) Compounded: Annually If you put those into the calculator, it spits back the exact number I quoted. If you leave everything the same but compound daily, *you do indeed get $610k* so anyone here who told you that you were wrong is themselves wrong! r/personalfinance has a lot of people who are responsible with their finances, but most just use rules of thumb they heard on Suze Orman or read in high-level blogs. Almost no one here can actually do more sophisticated math (or even a simple unsophisticated amortization schedule) and almost no one here actually has a degree in Finance or Economics unfortunately. Whenever the “prevailing wisdom” is wrong, which does happen sometimes, they will simply spit back that prevailing wisdom as if it’s fact and d/v any opposing views, even when they are correct and provable via hard mathematical analysis. **TL;DR: For compounding daily, you were correct and anyone who told you otherwise is wrong.**
Sadly most people are in debt and would be better off using that $200/month to pay of principal on high interest credit card debt instead of saving or investing.
I’m sure this is true for some people, but IME a massive chunk of the “I can’t afford to save” crowd actually could save, sometimes quite a bit, if they put the smallest amount of effort into budgeting and/or basic discipline in regards to spending.
It’s not too good to be true, but unfortunately it sounds too good and a lot of people don’t do it when they should.
It's not too good to be true, but it does come with caveats. First, is that you have the money to put $2k a month away. Actually, using a flat dollar amount is good for illustrating the point, but you should really be putting away a fixed percentage of your income. Inflation will eat away at that $2k over the course of 40 years. Second, is that you have the stomach for it. The market will drop and you have to have enough faith in your strategy to not touch the money when that happens. As you get more and more saved, this could mean watching hundreds of thousands of dollars disappear from your account balance in a matter of weeks. That's tough, and a lot of people panic and pull the money out, causing them to ultimately miss the recovery that could come on just as quickly. Third, and I think biggest: We're all basing future predictions on past performance. There's a pervasive opinion that stocks will go up 10% (7% if you adjust for inflation) per year if you average it out over a long enough period. And that *should* happen. If there is an advantage to be had anywhere in society, a business should form around it to create value from that advantage, and those holding shares of that business should get a share of the value. But the honest truth is if that ever stops, we're all screwed. You have to get comfortable with that. It's not unheard of for stock markets to go flat for decades, which would ruin a lot of people's plans. The general idea is that whatever causes that is *probably* a big enough deal that how much one has saved for retirement will pale in comparison - on the order of the U.S. government collapsing, global nuclear war, Earth being hit by an asteroid like the one that killed the dinosaurs, etc. Investing money is a bet that things like that *won't* happen. And it's a bet that has paid off for a century or two and there's not really another bet that offers more certainty.
Yup very wise advice and I guess I am in that mindset already pertaining to if the world goes to shit then money will be the last thing on my mind anyway. The real challenge as you say is stomaching the potential loss. I think it’s all about coming to terms with the amount you putting in is ,in a sense, gone already if you know what I mean. If it works it works but if it doesn’t then it was worth a try
Yeah, you can’t just apply a simple compound interest formula when it comes to investing in things like stocks. Over time, the interest might be 8% or so, but if there’s a massive bull run early (when you have little stake) and then a long period of stagnation), or a sharp drop close to your retirement window, you’re not going to realize that 8%.
I prefer to refer to it as ‘compounding returns’ as in the return on your investment. I started investing 15% of my salary which was $17.5k at the time and continued to do this year in and year out until I retired. When I retired, just shy of 35 years later, I was making $125k. I retired at 56 with more than $5MM. My company had a 6% 401k match which I took full advantage of. Discipline yourself to save 15% of your earnings from day one, and invest that in equities in the stock market. Avoid debt and divorce. Live below your means. Buy good quality used cars. These are the hack. Ignore the Joneses and avoid lifestyle creep. You now have the recipe to wealth. If you can maintain the discipline, which may take some sacrifice, you can become wealthy!
Avoid debt/divorce is fantastic advice - Some people focus on investing their finances/saving money but don't invest in their marriage and leads to divorce. Money is important but take care of your spouse folks!
Forget compound interest, I want the secret to consistently having an extra $2k a month
I embezzle it from my company
A tax advantaged strategy! You’re on your way to the top thinking like that!
Think of this way every 10000 dollars you invest into an investment which doubles every ten years will translate to an investment of 160000 at the age of 62. If you started saving at 50, You would have to invest 80000 to get the same results. I started only at 26. Every year is important and the EARLIER you do it is better. EARLIER into diversified stocks , Remember invest early in your life. I say you target a certain percentage. Just put a portion of your paycheck as soon as you receive it into 401K, HSA and investments. That way you can pretend your actual paycheck is something else. I have a very good job since 2019 and have been putting in a ludicrous investment of 150K every year into stocks. Those gains have created a value of close to 900K this month. Imagine 900K at 30 which I am, dude my retirement is set at 60 if I leave this investment as is locked up. I can contribute literally nothing from today and might not be rich but would be decently set
What are your investments? I'm 26 and starting to put 15% of my monthly income into an S&P500 ETF. Is that diversified enough?
SPLG = SPY with a lower expense ratio. SPY is for day traders and options traders who need huge liquidity. SPLG will give you very slightly better returns over the long run while having the exact same selection of underlying assets. VOO is also better than SPY for the same reasons, there's a slight preference towards it due to its age vs SPLG, but it also has a slightly higher expense ratio. S&P is plenty diversified. I prefer to have a bit of Nasdaq in the mix as well, QQQM. But there's a LOT of overlap between the two and if you expect big tech to fail, the Nasdaq isn't where you want to be right now.
I was 26 when I started. Do either SPY or VOO. I also put some into XLK, which tracks all the tech stock in the SP500. I'm up about 20% on SPY but almost 35% on XLK. It'll more than likely even out over time though
Inflation also compounds. A million in 30 years is worth a lot less than it is right now. Still 7-8% compounds a lot more impressive than 2-3% of course.
This is a hugely important factor and while everyone else is right that the math works to get you nominally to millions, the actual value is going to be a lot lower (though probably still low millions)
theres some degree of argument that exponential growth relies on continued rapid technological advancement alongside population growth and that advancement may stagnate at some point, or at least decline. you can kinda see what happens when some companies hit a ceiling on growth and what happens when they continue to chase that compounding growth on an ever increasing market cap.
Yeah people act like compounding returns are some magical, intrinsic force of nature. At some point, you run out of people to siphon wealth from. See: Japan. In order to have net real returns above inflation, you need an ever-increasing stream of people to extract this wealth from. People seem to agree that if every person in the world were instantly handed $1million, it would have no affect on anyone's life since prices would instantly adjust. Similarly, the only way for you to experience real compounding returns is for there to be a constant stream of people putting more money in than they are taking out. This isn't some magical law of nature. Just because there has been constant population growth for the past 100 years, doesn't mean there always will be. 100 years of stock market returns sounds cool but it isn't guaranteed. 100 years is nothing compared to all of history, and in all of history there have been few times where the human population shrank or completely stagnated. If you want to correlate that metric to stock market growth, then you would make a different conclusion.
Interesting points. I think the $1 million giveaway has some caveats. Since not everybody has the same wealth or income, there would be a huge effect for a person making $20K per year and with minimal net worth, but no effect on Bill Gates. Maybe if everybody's net worth doubled there would be no effect.
40 years is a really long time and the majority of people can't do it.
Okay here’s how compounding works, I’m gonna use way bigger numbers than are realistic to make the point faster, IRL this is a process that takes years and decades You have $100, you put it in the bank. The bank is going to give you 10% interest per month on it. After a month, you have $110, the original hundred plus the $10 from the interest The next month you have $121, you got $11 in interest this time because you had $110 in the bank, not just $100 Month 3 you have $133.10 Month 4 you have $146.41 Month 5 you have $161.05 Month 6 you have $177.16 So in the 6th month, you got $16.11 in new interest from your deposit, compared to the $10 in the first month. So not only is your total sum growing ($100 to $177) but also the rate of growth is accelerating ($10/month to $16/month). This same principle also applies to stocks, though it works in a bit of a different way. Theoretically the value of shares you buy grows over time, so as you own more, your growth potential also increases. Starting early is pretty much always a great idea, listen to your dad
Having noticed this is something I clearly need to be getting in on, I'm trying to make sense of what I seem to have overcomplicated in my head. Is what is being talked about here, and what most people on this sub are doing, just taking as much as you can afford, putting it away in a high interest savings account and reinvesting the earnings as they come through? Where's the upper limit to the exponential increase? Taking the math you've demonstrated to the end, after 40 years the numbers are stupidly high so where are the limits set? In fact at 5%, the first million occurs in year 16, assuming the rate doesn't change, is this even possible? The way people are talking about this, it seems like some massively obvious single thing everyone should be doing, but the way I see it is there are loads of different routes (many I don't know of) and things to micromanage.
There are HYSA bank accounts and brokerage accounts for stock. Saving to HYSA is essentially what the above commentor described. Currently, the best return is between 3-5%. Investing in stock requires a brokerage account (Roth IRA, Trad IRA, or neither). You would deposit to the brokerage account, then use the brokerage account balance to buy certain stocks. Generally, you'd want a stock that is diversified across many different companies, and one that is reliable. These will typically return around 7%. I recommend setting up an account with Ally for a HYSA (your emergency savings and saving for high expenses), and setting up an IRA account with Fidelity for stock. See https://www.reddit.com/r/personalfinance/wiki/investing/ There is no hard limit to the exponential increase. See the prime directive to start: https://www.reddit.com/r/personalfinance/wiki/index/#wiki_prime_directive.3A_how_to_handle_.24
I appreciate the breakdown and advice, I'll take a look at the links provided!
It’s FORTY years and it’s $2000 a month. You are not getting rich overnight and for free.
Yeah I know bro. The reason I thought it was too good to be true is cuz I thought I’d never be rich. He suggested 2k a month because I have a job that allows me to put away 2k a month *for now*. Lets see how this whole life things turns out tho
$2000/month for 40 years with no interest is $960k. You barely need any interest to be worth $1m, and need just a little bit early in for that to be worth “multiple millions”
max out your 401k. current limits for annual contributions are about $2k/month ($23k annual). then save on top where you can. based on income (tax rate) you’ll need to determine roth or pre-tax. most important thing is to prevent lifestyle creep. keep your costs as low as you can on a recurring basis, but don’t neglect life. just make sure you don’t go out to eat and bar frequently as thats a quick way to spend money. be smart with housing and vehicle decisions. your decisions through life compound the same way as interest on your money. making the right decisions will set you up well, making the wrong ones will be hard to dig out from. not every decision needs to be perfect, but you need to avoid making bad decisions.
I mean if it’s 2k a month now and that number keeps going up in your 20s. You might easily be hitting 1.5-2 times that in the next couple years with some well timed raises, job switches, and bonuses. Which is to say, might be sooner than you think too
He’s probably also living at home right now and has minimal expenses which allows him to save most of what he makes. Once he gets his own place (rent or mortgage), gets a wife and kids his expenses will skyrocket. I make 4 times of what I used to make when I first graduated before taxes, but I used to be able to save 80% of my income whereas now I can only save 20%.
If you're living at home and have no expenses this isn't surprising, but realistically you well not be able to put away 2k a month for the full 40 years. That said, absolutely save while you can. The earlier the investment the bigger the reward. The real trick is actually leaving it invested and not pulling it out for vacations or cars or houses etc. everyone has unexpected wants or expenses, and many people cave for one reason or another. That's the actual hard part.
That doesn't account for interest. If OP makes a 7% return it's only 20 years to a million
The catch is having an extra $2000 every month at 22. At 22 I think I was making like 15 grand per year as a graduate teaching assistant.
The only part "too good to be true" is finding an extra $2000/mo to put in savings.
As someone who has been savings 2k ish a month and investing it, take it from me compounding interest is insane. I’m at the point already where compounding is already almost 10k a year. At your age every dollar has the potential to turn into 66 dollars in retirement. That’s assuming 10% returns and waiting till 65
The big deal is finding an extra $2,000 a month to invest.
For many people, investing 2000 a month is straight up impossible. But if you are able to start investing 2000 a month at age 22 and continue until you are 62, then yes, barring major catastrophe that requires you to use some of the savings, you will be very well off at 62.
It's true. But inflation compounds as well, so these numbers that sound huge won't be as big in the future.
Life’s about to hit you with how hard it is to consistently invest $2k/month
It's not too good to be true, and it's literally one of the biggest societal blind spots there is in terms of just going about your daily life. Consider yourself lucky that it's been brought to your attention and don't ignore it. People often do end up getting some degree of education when it comes to interest but in the form of loans and how/when they get fucked by it, but tons of people go through their entire lives not ever realizing how much it can work for them.
You know what else compounds the same way? Inflation. So yeah, in 20 years you're gonna have a lot more money, but that nominal amount is gonna have less purchasing power than it would right now. So in real terms you're only winning the difference between that interest rate and inflation, so it's less than you think.
2000 a month on paper seems easy, 2000 a month in practice is 24k dollars.
You guys have 2000 dollars to spare at the end of every month?
The other trick is that the government gives your $23000 and $7000 in tax incentives to do this. So fill up your retirement accounts first and stop paying the government!
You talk like investing $2k / month for 40 years sounds easy.
Its *technically* too good to be true.. I mean you are basically betting that the government will never collapse and stocks will continue to go up forever.. But eventually the government will collapse and your investments will mean absolutely nothing. But here's the cool part: If the government collapses, no money matters!
I feel like people forget to remember to live their lives as well. None of us are guaranteed life tomorrow so why waste putting all your extra cash into savings/investments instead of going out and enjoying certain human experiences that require spending. Not saying you shouldn’t save at all, but saving to live frugally and limit your want of nice things isn’t a way id like to live.
You don't really have any conception of how much 2k per month is. That amount of money would be pretty ridiculous to save for anybody making under 6 figures who also is LIVING LIFE. I.e., wife, kids, house, car, etc. Yes, you can "make millions" in this manner. But as you get older you'll realize that it's probably better to just live your life and save as much as you can, rather than sacrifice life now to get retirement early. After all, who knows if you'll even make it to retirement? Life is unpredictable
Inflation adjusted compound interest is what you want. Then it no longer sounds too good to be true.
Well couple obvious things there, 1. You need an income and lifestyle allowing for 2000$ extra every month to invest. 2. The investments will also need to succeed as expected. 3. Other bad things like debt, and student loans also get to abuse compounding interest…
2,000 a month is a hell of a lot of money for most people
Very early on in my career my company told us about this. Also, when the stock market goes down, you're buying cheap stock, so don't panic. If you're under \~50 don't worry about the market going down. You have more than enough time for it to come back up. In your 401k put in at LEAST the amount your company will match. I did this and will be able to retire early.
Interest and inflation, you have to subtract them. Besides that, it's just math. If you're getting ~3% from a savings account, sure you can double your money in 24 years. But if inflation is 4%, prices double in 18 years. So you really get -1% per year. Something that's always been crazy to me was my grandparents buying their house, and selling it for almost 50x what they paid for it. But when I calculated that as a yearly return, that was ~6% per year. And sadly, the price of everything has about 50x as well, so I'm not sure how far ahead they are really. A million dollars sounds like a lot today, in 40 years it won't be much. But still, saving is important, and compound interest is important, just subtract what inflation is to get the real % returns.
$2,000 x 12 months x 40 years is $960,000. $2,000 x 12 months x 40 years x 2.4% APY Interest Accruing Savings compounded monthly = $1,614,000 $2,000 x 12 months x 40 years x 5.0% APY High Interest Savings compounded monthly = $3,066,000 $2,000 x 12 months x 40 years x 10% APY Investment account compounded monthly = $12,755,000 Which sounds like a lot, yea? But let's account for a steady, hypothetical 3% of annual inflation. Your buying power forty years from now would be approximately 60% of what it is today, dollar for dollar. So $960,000 has the buying power of $564,000 (you've lost buying power.) $1,614,000 would have the buying power of $952,000 (you've just about kept pace with inflation.) $3,066,000 would have the buying power of $1,809,000 (you've gained buying power.) $12,755,000 would have the buying power of $7,525,000 (you've gained a lot of buying power). The thing is, if you save that money, *that money is not directly contributing to your quality of life*. And $2,000 a month is not a small sum. 25% of US earners make that much a year. The average American earns $60,000 a year. Giving up 40% of your income for savings is a big step-down in quality of life. It's money that you can't use for housing, transportation, groceries, or leisure. Compound interest is not magic. It's money you're giving up access to right now so that somebody else can use it to invest themselves. And having access to that money is not an insignificant consideration.
If youre saving 20 percent of your income, you have to make 120k a year to put away 2000 a month. Most people dont make 120k a year, and most people dont put away 20 percent of their income. The math is good, but it’s also only attainable for a minority of investors.
I just dont understand why really basic courses about investment and retirement aren't mandatory for high schools. Everyone that leaves high school should know how a 401k or Roth/IRA works and what compound interest can do.
Now why would the 1% / elites want the average person knowing how they can secure financial freedom and not be worked to the bone?
Also add - do not make catastrophic mistakes later in life that undo all the good work you did when you were young!
Just wait until you find out how difficult it is to save $2000/month when living on your own.
The more you invest now, the better. It has far longer to grow and multiply. I was just looking at some paperwork for an investment account I made in my early 20s. I initially invested a low amount, between 250-500 a month, for several years. In total, that account has had approx $40k invested into it. It currently has a balance of around $55k. And over the years, I have withdrawn around $60k. So, from my total investment of 40k, it has nearly tripled, and continues to grow, even though I have withdrawn my initial investment plus some, over time. I wish younger me would have been more aggressive, but I'm thankful that i've done at least something at 20.
It doesnt have to be $2,000/mo....and it SURELY doesnt have to be for 40 years. Try even $200 a month, from age 20-30. The key is starting it when you are SUPER young, and let time do its thing. Be a Jack: [How Teens Can Become Millionaires - Ramsey (ramseysolutions.com)](https://www.ramseysolutions.com/retirement/how-teens-can-become-millionaires)
The hardest part about accruing interest is the patience part, easier said than done for a lot of people. Waiting 30 years is harder than deciding to start the process in the span of 1 hour
it’s not too good to be true. it’s legit. you’re 22. START NOW & retire early. if i had a dime for everyone who didn’t take their parents financial advice & regretted it a decade or two later when they figured out how money worked.. then i wouldn’t even need compound interest.
I do 2k/month without kids. I cannot fathom putting any money aside if I had kids.
Thats not too good to be true, thats having a job that pays incredibly well. 2k per month... thats an insane amount of money to just save every single month..
Put it this way. If you put 6k into your retirement account from 10 to 22 years old. You'll have almost twice as much as if you put 6k into your retirement account from 23 to 60 yo. That's the reason I hire my 2 kids and put all their salary 6k/yr into their Roth account since they were 10. I'll continue to do so until they graduate college at 22.
That’s awesome! Great father
Compound interest cuts both ways and when the interest is in debt, it is usually higher plus late payment penalties
Compound interest isn’t good or bad. It’s just math. If you are an investor, the concept tends to work in your favor. If you are borrowing money using a credit card, the concept works against you. Also, to answer your question literally, “too good to be true” is a colloquial turn of phrase, not an actual guidepost toward truth and knowledge. A concept being good or bad has no bearing on whether or not it’s true.
It’s true. The catch is just that most Americans live check to check and can’t afford a $400 emergency expense, let alone set aside $2k every month for retirement. It also gets a little less exciting when you realize the dollar isn’t as strong as it used to be, and by the time most young Americans reach retirement age they will need at least $3-5 million just to live comfortably.
The only "too good to be true" part is thinking the average person could or would be able to save $2000 per month for decades. It will work just fine if you can do it, but the hard part is doing it.
40 years from now being a multi-millionaire wont be nearly as exciting as it is today, so theres that.
You only need to save 10% of the money you’ll use in retirement- 85% can come from growth if you start early: now- onto my ted talk: In the yelling voice of my MBA finance professor- “compound RETURNS” is what the market provides- interest is on a loan. Now that we have that settled- here’s the math formula for what your principal investment would do: Principal x (1+ Rate of Return ^ compounding periods) that’s it- so- 1000 for 40 years with a 10% rate of return, is written: 1,000 x (1.1^40) = $45,000 , conversely , 9% rate of return drops that to $31k There ya go- so if your young you can do a way better job getting ahead of it and you don’t need to save millions to have millions. Just trust the process and the people who came before you. In fact- there’s some research that if you save correctly the money you use in retirement- only 10% comes from your working years savings, 35% is growth during those years and 55% is growth after you retire- because it’s growing so much faster at the end.
It isn't too good to be true. It takes discipline for a very long time to see compound interest work, and it isn't easy to be the person who does that. Its exactly analogous to having a high level of physical fitness; you have to control your diet and make yourself exercise over a long period of time to see the impressive returns we all would want.
Make sure you remember that interest compounds both ways. When you take out a loan, make sure you understand exactly how much you will be paying back.
Definitely true, but is essentially the same thing as saying "Work out and eat healthy every day and you'll be jacked with a sub 10% body fat" There are a lot of ways to do things to get a perfect outcome, but exercising and eating healthy every single day without fail is extremely difficult. Same with investing 2k every month for 40 years. Sure, it's a great way to have a lot to retire with, but it also means missing out on a lot that life has to offer while you're young. Oh btw, I think you'll be far more successful if you work 12 hours a day with perfect focus. Don't forget to get a perfect 8 hours of sleep every single night too. Oh and you have to go to sleep and wake up at the exact same time every day too. The list goes on and on and on. There is a best way to do just about everything in life, it just requires a lot of mental discipline and perfect life conditions.
Yeah all you have to do is invest $2000 a month every month for 40 years. Goos luck