Benjamin Graham lived a remarkably productive life. Besides being one of our nation’s Founding Fathers, he was a prolific author, a scientist, an inventor, a printer, a postmaster, a humorist, a statesman and a diplomat. His daily schedule as recorded in his autobiography is one for the keeps.
His relationship with money was equally inspiring. He viewed money not just as a means to personal wealth but also as a tool for societal good. He believed that hard work, saving and wise investing were essential for both individual prosperity and the betterment of society. He is credited with timeless money quotes like a penny saved is a penny earned and money makes money, and the money that makes money, makes money.
He died in 1790 and left his life savings of $10,000 to be equally split amongst two of his favorite cities – Boston and Philadelphia. But he left the money with some strings attached…
- The money was to be used to make low-interest loans to young tradesmen getting their start in business.
- Each city can only use the first half of whatever that money grows to after 100 years.
- And the second half after 200 years.
In 1890, at the end of the first 100-year period, each city received $500,000 to be spent on public goods. That is what $2,500 turned into after 100 years of compounding growth. The rate of return it took to turn $2,500 into $500,000 in 100 years was a respectable but not outlandish 5.44% each year. Time did the rest of the work.
In 1990, after 200 years that Mr. Franklin required the money to remain invested, each city received the remaining bequest. Any guesses how much the second $2,500 turned into? 20 million dollars.
And again, you’d think you’d need some impressive investing chops to achieve that. Nope. It took a relatively modest 4.6% rate of return each year but doing that for 200 years is what did the trick. And all that while helping countless young entrepreneurs get a headstart in life – the best use of wealth if there ever was.
Granted, we don’t live on 200-year timelines but if you have been investing for a couple decades, you are likely seeing the fruits of compound interest take hold with your own money. Like you’ll start seeing years where your money makes more money than what you make in your paychecks.
Greek mathematician Archimedes once theorized that if he had a lever long enough and a fulcrum on which to place it on, he can move the world. Time is the Archimedes lever of investing and the fulcrum is the amount you invest. Warren Buffett is in his nineties and is one of the wealthiest people around. But 99% of his wealth came after his 50th birthday. And no one knows compound interest better than him.
When my daughters were little, I would present the compound interest math at every chance I got. I am sure you have seen a version of it before.
FV = PV x (1 + r)T
FV is the Future Value of your savings
PV is the Present Value
r is the rate of return
T is time
So assume I invest $1,000 (PV) at age 20 and earn a 10% rate of return (r) on it each year. In 5 years (T), that $1,000 will grow to $1,610 (FV). No big deal.
But in 30 years when I am age 50, I’d have 17 times my original $1,000 investment. In another 10 years when I turn 60, my original investment of $1,000 will grow to 45 times that. And think about this. I make more money in the last 10 years after age 60 than what I made in the previous 40 years combined.
Amazing, isn’t it? The growth in the early years is painfully slow and that is when many give up. But stay on the path long enough and you won’t believe your bank accounts.
Now imagine instead of a single, one-time investment, I invest $1,000 each month starting at age 20 and do it for the next 50 years.
This is fully-funding a great retirement even after accounting for inflation. It requires some early sacrifices and then time takes it over from there. Because when money makes money on money, you reach a stage in life where your investments do the hard work while you get to coast.
Like say I start with investing the same $1,000 a month at age 20 but stop at age 50, how much of the last 20 years of not investing new money matter? Apparently, not much.
Early contributions are way more valuable than contributions that come later.
And since we are talking about fully-funding a great retirement, maybe your goal is to save a “modest” 10-million dollars by the time you retire at age 70. The table below shows what you would have to save each month at different stages in life at different rates of return.
Highlighting some markers in blue for the 7% investment return column that a balanced portfolio of stocks and bonds have historically delivered, starting at age 20 makes the journey a lot easier than if you were to delay saving for that goal till age 40. And each year you delay, the task gets exponentially harder.
And taking measured risks with your money makes a world of difference in how easy or difficult the task gets. For example, at 10% investment return which the stock market has historically delivered, reaching the ten-million-dollar goal is a breeze compared to the 5% rate of return that an all-bonds portfolio has historically earned.
A 500 or a thousand dollars a month is big money to save, especially when in your 20s but if you’ve got a half-decent 401(k) plan at work with an employer match to boot, I guarantee you won’t feel it. You just need to start. The Archimedes lever does the rest of the work.
Thank you for your time.
Cover image credit – Pixabay