The interesting thing about interest, is that it acts as our frenemy (friend/enemy). It’s often a major player in wealth building, but also one of the driving forces behind the ‘paycheck-to-paycheck’ lifestyle. It can work for or against you. The choice is yours.
To kick things off, I thought I’d start with a chart I’m sure we’ve all seen before. It shows just how important investing while you’re young really is. It compares a 25 year old that invests for 11 years, to a 35 year old that invests for 26 years. The results are rather interesting (pun intended)….
Pretty crazy stuff, huh? The younger dude only invested for 11 years, but came out with a butt-load more money than the older dude. It just goes to show that interest can be your best friend, especially when you have time on your side, but as Newton’s 3rd Law of Motion says: “To every action there is an equal and opposite reaction”
This, my friends, means that interest can bend you over and….well we won’t go there. Unfortunately, a bunch of people (maybe you being one of them) don’t realize this. They see a $15/month credit card payment and think life is just peachy. News Flash: It’s not that simple.
The following table shows how long it takes to payoff a $10,000 credit card debt (13% interest rate), when only minimum monthly payments are made. Any guesses as to how long it will take to pay off this debt? Scroll down to find out…
This is what I call gettin’ scr-izz-ewed….
Month
Minimum
Payment
Interest
Paid
Principal
Paid
Remaining
Balance
1
$200.00
$108.33
$91.67
$9908.33
2
$198.17
$107.34
$90.83
$9817.50
3
$196.35
$106.36
$89.99
$9727.51
4
$194.55
$105.38
$89.17
$9638.34
5
$192.77
$104.42
$88.35
$9549.99
6
$191.00
$103.46
$87.54
$9462.45
7
$189.25
$102.51
$86.74
$9375.71
8
$187.51
$101.57
$85.94
$9289.77
9
$185.80
$100.64
$85.16
$9204.61
10
$184.09
$99.72
$84.37
$9120.24
11
$182.40
$98.80
$83.60
$9036.64
12
$180.73
$97.90
$82.83
$8953.81
13
$179.08
$97.00
$82.08
$8871.73
14
$177.43
$96.11
$81.32
$8790.41
15
$175.81
$95.23
$80.58
$8709.83
16
$174.20
$94.36
$79.84
$8629.99
17
$172.60
$93.49
$79.11
$8550.88
18
$171.02
$92.63
$78.39
$8472.49
19
$169.45
$91.79
$77.66
$8394.83
20
$167.90
$90.94
$76.96
$8317.87
21
$166.36
$90.11
$76.25
$8241.62
22
$164.83
$89.28
$75.55
$8166.07
23
$163.32
$88.47
$74.85
$8091.22
24
$161.82
$87.65
$74.17
$8017.05
25
$160.34
$86.85
$73.49
$7943.56
26
$158.87
$86.06
$72.81
$7870.75
27
$157.42
$85.27
$72.15
$7798.60
28
$155.97
$84.48
$71.49
$7727.11
29
$154.54
$83.71
$70.83
$7656.28
30
$153.13
$82.94
$70.19
$7586.09
31
$151.72
$82.18
$69.54
$7516.55
32
$150.33
$81.43
$68.90
$7447.65
33
$148.95
$80.68
$68.27
$7379.38
34
$147.59
$79.94
$67.65
$7311.73
35
$146.23
$79.21
$67.02
$7244.71
36
$144.89
$78.48
$66.41
$7178.30
37
$143.57
$77.76
$65.81
$7112.49
38
$142.25
$77.05
$65.20
$7047.29
39
$140.95
$76.35
$64.60
$6982.69
40
$139.65
$75.65
$64.00
$6918.69
41
$138.37
$74.95
$63.42
$6855.27
42
$137.11
$74.27
$62.84
$6792.43
43
$135.85
$73.58
$62.27
$6730.16
44
$134.60
$72.91
$61.69
$6668.47
45
$133.37
$72.24
$61.13
$6607.34
46
$132.15
$71.58
$60.57
$6546.77
47
$130.94
$70.92
$60.02
$6486.75
48
$129.74
$70.27
$59.47
$6427.28
49
$128.55
$69.63
$58.92
$6368.36
50
$127.37
$68.99
$58.38
$6309.98
51
$126.20
$68.36
$57.84
$6252.14
52
$125.04
$67.73
$57.31
$6194.83
53
$123.90
$67.11
$56.79
$6138.04
54
$122.76
$66.50
$56.26
$6081.78
55
$121.64
$65.89
$55.75
$6026.03
56
$120.52
$65.28
$55.24
$5970.79
57
$119.42
$64.68
$54.74
$5916.05
58
$118.32
$64.09
$54.23
$5861.82
59
$117.24
$63.50
$53.74
$5808.08
60
$116.16
$62.92
$53.24
$5754.84
61
$115.10
$62.34
$52.76
$5702.08
62
$114.04
$61.77
$52.27
$5649.81
63
$113.00
$61.21
$51.79
$5598.02
64
$111.96
$60.65
$51.31
$5546.71
65
$110.93
$60.09
$50.84
$5495.87
66
$109.92
$59.54
$50.38
$5445.49
67
$108.91
$58.99
$49.92
$5395.57
68
$107.91
$58.45
$49.46
$5346.11
69
$106.92
$57.92
$49.00
$5297.11
70
$105.94
$57.39
$48.55
$5248.56
71
$104.97
$56.86
$48.11
$5200.45
72
$104.01
$56.34
$47.67
$5152.78
73
$103.06
$55.82
$47.24
$5105.54
74
$102.11
$55.31
$46.80
$5058.74
75
$101.17
$54.80
$46.37
$5012.37
76
$100.25
$54.30
$45.95
$4966.42
77
$99.33
$53.80
$45.53
$4920.89
78
$98.42
$53.31
$45.11
$4875.78
79
$97.52
$52.82
$44.70
$4831.08
80
$96.62
$52.34
$44.28
$4786.80
81
$95.74
$51.86
$43.88
$4742.92
82
$94.86
$51.38
$43.48
$4699.44
83
$93.99
$50.91
$43.08
$4656.36
84
$93.13
$50.44
$42.69
$4613.67
85
$92.27
$49.98
$42.29
$4571.38
86
$91.43
$49.52
$41.91
$4529.47
87
$90.59
$49.07
$41.52
$4487.95
88
$89.76
$48.62
$41.14
$4446.81
89
$88.94
$48.17
$40.77
$4406.04
90
$88.12
$47.73
$40.39
$4365.65
91
$87.31
$47.29
$40.02
$4325.63
92
$86.51
$46.86
$39.65
$4285.98
93
$85.72
$46.43
$39.29
$4246.69
94
$84.93
$46.01
$38.92
$4207.77
95
$84.16
$45.58
$38.58
$4169.19
96
$83.38
$45.17
$38.21
$4130.98
97
$82.62
$44.75
$37.87
$4093.11
98
$81.86
$44.34
$37.52
$4055.59
99
$81.11
$43.94
$37.17
$4018.42
100
$80.37
$43.53
$36.84
$3981.58
101
$79.63
$43.13
$36.50
$3945.08
102
$78.90
$42.74
$36.16
$3908.92
103
$78.18
$42.35
$35.83
$3873.09
104
$77.46
$41.96
$35.50
$3837.59
105
$76.75
$41.57
$35.18
$3802.41
106
$76.05
$41.19
$34.86
$3767.55
107
$75.35
$40.82
$34.53
$3733.02
108
$74.66
$40.44
$34.22
$3698.80
109
$73.98
$40.07
$33.91
$3664.89
110
$73.30
$39.70
$33.60
$3631.29
111
$72.63
$39.34
$33.29
$3598.00
112
$71.96
$38.98
$32.98
$3565.02
113
$71.30
$38.62
$32.68
$3532.34
114
$70.65
$38.27
$32.38
$3499.96
115
$70.00
$37.92
$32.08
$3467.88
116
$69.36
$37.57
$31.79
$3436.09
117
$68.72
$37.22
$31.50
$3404.59
118
$68.09
$36.88
$31.21
$3373.38
119
$67.47
$36.54
$30.93
$3342.45
120
$66.85
$36.21
$30.64
$3311.81
121
$66.24
$35.88
$30.36
$3281.45
122
$65.63
$35.55
$30.08
$3251.37
123
$65.03
$35.22
$29.81
$3221.56
124
$64.43
$34.90
$29.53
$3192.03
125
$63.84
$34.58
$29.26
$3162.77
126
$63.26
$34.26
$29.00
$3133.77
127
$62.68
$33.95
$28.73
$3105.04
128
$62.10
$33.64
$28.46
$3076.58
129
$61.53
$33.33
$28.20
$3048.38
130
$60.97
$33.02
$27.95
$3020.43
131
$60.41
$32.72
$27.69
$2992.74
132
$59.85
$32.42
$27.43
$2965.31
133
$59.31
$32.12
$27.19
$2938.12
134
$58.76
$31.83
$26.93
$2911.19
135
$58.22
$31.54
$26.68
$2884.51
136
$57.69
$31.25
$26.44
$2858.07
137
$57.16
$30.96
$26.20
$2831.87
138
$56.64
$30.68
$25.96
$2805.91
139
$56.12
$30.40
$25.72
$2780.19
140
$55.60
$30.12
$25.48
$2754.71
141
$55.09
$29.84
$25.25
$2729.46
142
$54.59
$29.57
$25.02
$2704.44
143
$54.09
$29.30
$24.79
$2679.65
144
$53.59
$29.03
$24.56
$2655.09
145
$53.10
$28.76
$24.34
$2630.75
146
$52.62
$28.50
$24.12
$2606.63
147
$52.13
$28.24
$23.89
$2582.74
148
$51.65
$27.98
$23.67
$2559.07
149
$51.18
$27.72
$23.46
$2535.61
150
$50.71
$27.47
$23.24
$2512.37
151
$50.25
$27.22
$23.03
$2489.34
152
$49.79
$26.97
$22.82
$2466.52
153
$49.33
$26.72
$22.61
$2443.91
154
$48.88
$26.48
$22.40
$2421.51
155
$48.43
$26.23
$22.20
$2399.31
156
$47.99
$25.99
$22.00
$2377.31
157
$47.55
$25.75
$21.80
$2355.51
158
$47.11
$25.52
$21.59
$2333.92
159
$46.68
$25.28
$21.40
$2312.52
160
$46.25
$25.05
$21.20
$2291.32
161
$45.83
$24.82
$21.01
$2270.31
162
$45.41
$24.60
$20.81
$2249.50
163
$44.99
$24.37
$20.62
$2228.88
164
$44.58
$24.15
$20.43
$2208.45
165
$44.17
$23.92
$20.25
$2188.20
166
$43.76
$23.71
$20.05
$2168.15
167
$43.36
$23.49
$19.87
$2148.28
168
$42.97
$23.27
$19.70
$2128.58
169
$42.57
$23.06
$19.51
$2109.07
170
$42.18
$22.85
$19.33
$2089.74
171
$41.79
$22.64
$19.15
$2070.59
172
$41.41
$22.43
$18.98
$2051.61
173
$41.03
$22.23
$18.80
$2032.81
174
$40.66
$22.02
$18.64
$2014.17
175
$40.28
$21.82
$18.46
$1995.71
176
$39.91
$21.62
$18.29
$1977.42
177
$39.55
$21.42
$18.13
$1959.29
178
$39.19
$21.23
$17.96
$1941.33
179
$38.83
$21.03
$17.80
$1923.53
180
$38.47
$20.84
$17.63
$1905.90
181
$38.12
$20.65
$17.47
$1888.43
182
$37.77
$20.46
$17.31
$1871.12
183
$37.42
$20.27
$17.15
$1853.97
184
$37.08
$20.08
$17.00
$1836.97
185
$36.74
$19.90
$16.84
$1820.13
186
$36.40
$19.72
$16.68
$1803.45
187
$36.07
$19.54
$16.53
$1786.92
188
$35.74
$19.36
$16.38
$1770.54
189
$35.41
$19.18
$16.23
$1754.31
190
$35.09
$19.01
$16.08
$1738.23
191
$34.76
$18.83
$15.93
$1722.30
192
$34.45
$18.66
$15.79
$1706.51
193
$34.13
$18.49
$15.64
$1690.87
194
$33.82
$18.32
$15.50
$1675.37
195
$33.51
$18.15
$15.36
$1660.01
196
$33.20
$17.98
$15.22
$1644.79
197
$32.90
$17.82
$15.08
$1629.71
198
$32.59
$17.66
$14.93
$1614.78
199
$32.30
$17.49
$14.81
$1599.97
200
$32.00
$17.33
$14.67
$1585.30
201
$31.71
$17.17
$14.54
$1570.76
202
$31.42
$17.02
$14.40
$1556.36
203
$31.13
$16.86
$14.27
$1542.09
204
$30.84
$16.71
$14.13
$1527.96
205
$30.56
$16.55
$14.01
$1513.95
206
$30.28
$16.40
$13.88
$1500.07
207
$30.00
$16.25
$13.75
$1486.32
208
$29.73
$16.10
$13.63
$1472.69
209
$29.45
$15.95
$13.50
$1459.19
210
$29.18
$15.81
$13.37
$1445.82
211
$28.92
$15.66
$13.26
$1432.56
212
$28.65
$15.52
$13.13
$1419.43
213
$28.39
$15.38
$13.01
$1406.42
214
$28.13
$15.24
$12.89
$1393.53
215
$27.87
$15.10
$12.77
$1380.76
216
$27.62
$14.96
$12.66
$1368.10
217
$27.36
$14.82
$12.54
$1355.56
218
$27.11
$14.69
$12.42
$1343.14
219
$26.86
$14.55
$12.31
$1330.83
220
$26.62
$14.42
$12.20
$1318.63
221
$26.37
$14.29
$12.08
$1306.55
222
$26.13
$14.15
$11.98
$1294.57
223
$25.89
$14.02
$11.87
$1282.70
224
$25.65
$13.90
$11.75
$1270.95
225
$25.42
$13.77
$11.65
$1259.30
226
$25.19
$13.64
$11.55
$1247.75
227
$24.96
$13.52
$11.44
$1236.31
228
$24.73
$13.39
$11.34
$1224.97
229
$24.50
$13.27
$11.23
$1213.74
230
$24.27
$13.15
$11.12
$1202.62
231
$24.05
$13.03
$11.02
$1191.60
232
$23.83
$12.91
$10.92
$1180.68
233
$23.61
$12.79
$10.82
$1169.86
234
$23.40
$12.67
$10.73
$1159.13
235
$23.18
$12.56
$10.62
$1148.51
236
$22.97
$12.44
$10.53
$1137.98
237
$22.76
$12.33
$10.43
$1127.55
238
$22.55
$12.22
$10.33
$1117.22
239
$22.34
$12.10
$10.24
$1106.98
240
$22.14
$11.99
$10.15
$1096.83
241
$21.94
$11.88
$10.06
$1086.77
242
$21.74
$11.77
$9.97
$1076.80
243
$21.54
$11.67
$9.87
$1066.93
244
$21.34
$11.56
$9.78
$1057.15
245
$21.14
$11.45
$9.69
$1047.46
246
$20.95
$11.35
$9.60
$1037.86
247
$20.76
$11.24
$9.52
$1028.34
248
$20.57
$11.14
$9.43
$1018.91
249
$20.38
$11.04
$9.34
$1009.57
250
$20.19
$10.94
$9.25
$1000.32
251
$20.01
$10.84
$9.17
$991.15
252
$19.82
$10.74
$9.08
$982.07
253
$19.64
$10.64
$9.00
$973.07
254
$19.46
$10.54
$8.92
$964.15
255
$19.28
$10.44
$8.84
$955.31
256
$19.11
$10.35
$8.76
$946.55
257
$18.93
$10.25
$8.68
$937.87
258
$18.76
$10.16
$8.60
$929.27
259
$18.59
$10.07
$8.52
$920.75
260
$18.42
$9.97
$8.45
$912.30
261
$18.25
$9.88
$8.37
$903.93
262
$18.08
$9.79
$8.29
$895.64
263
$17.91
$9.70
$8.21
$887.43
264
$17.75
$9.61
$8.14
$879.29
265
$17.59
$9.53
$8.06
$871.23
266
$17.42
$9.44
$7.98
$863.25
267
$17.26
$9.35
$7.91
$855.34
268
$17.11
$9.27
$7.84
$847.50
269
$16.95
$9.18
$7.77
$839.73
270
$16.79
$9.10
$7.69
$832.04
271
$16.64
$9.01
$7.63
$824.41
272
$16.49
$8.93
$7.56
$816.85
273
$16.34
$8.85
$7.49
$809.36
274
$16.19
$8.77
$7.42
$801.94
275
$16.04
$8.69
$7.35
$794.59
276
$15.89
$8.61
$7.28
$787.31
277
$15.75
$8.53
$7.22
$780.09
278
$15.60
$8.45
$7.15
$772.94
279
$15.46
$8.37
$7.09
$765.85
280
$15.32
$8.30
$7.02
$758.83
281
$15.18
$8.22
$6.96
$751.87
282
$15.04
$8.15
$6.89
$744.98
283
$15.00
$8.07
$6.83
$738.05
284
$15.00
$8.00
$6.76
$731.05
285
$15.00
$7.92
$6.70
$723.97
286
$15.00
$7.84
$6.64
$716.81
287
$15.00
$7.77
$6.57
$709.58
288
$15.00
$7.69
$6.50
$702.27
289
$15.00
$7.61
$6.44
$694.88
290
$15.00
$7.53
$6.37
$687.41
291
$15.00
$7.45
$6.30
$679.86
292
$15.00
$7.37
$6.23
$672.23
293
$15.00
$7.28
$6.16
$664.51
294
$15.00
$7.20
$6.09
$656.71
295
$15.00
$7.11
$6.02
$648.82
296
$15.00
$7.03
$5.95
$640.85
297
$15.00
$6.94
$5.88
$632.79
298
$15.00
$6.86
$5.80
$624.65
299
$15.00
$6.77
$5.72
$616.42
300
$15.00
$6.68
$5.65
$608.10
301
$15.00
$6.59
$5.57
$599.69
302
$15.00
$6.50
$5.49
$591.19
303
$15.00
$6.40
$5.42
$582.59
304
$15.00
$6.31
$5.34
$573.90
305
$15.00
$6.22
$5.26
$565.12
306
$15.00
$6.12
$5.18
$556.24
307
$15.00
$6.03
$5.09
$547.27
308
$15.00
$5.93
$5.02
$538.20
309
$15.00
$5.83
$4.93
$529.03
310
$15.00
$5.73
$4.85
$519.76
311
$15.00
$5.63
$4.77
$510.39
312
$15.00
$5.53
$4.68
$500.92
313
$15.00
$5.43
$4.59
$491.35
314
$15.00
$5.32
$4.51
$481.67
315
$15.00
$5.22
$4.41
$471.89
316
$15.00
$5.11
$4.33
$462.00
317
$15.00
$5.00
$4.24
$452.00
318
$15.00
$4.90
$4.14
$441.90
319
$15.00
$4.79
$4.05
$431.69
320
$15.00
$4.68
$3.95
$421.37
321
$15.00
$4.56
$3.87
$410.93
322
$15.00
$4.45
$3.77
$400.38
323
$15.00
$4.34
$3.67
$389.72
324
$15.00
$4.22
$3.57
$378.94
325
$15.00
$4.11
$3.47
$368.05
326
$15.00
$3.99
$3.37
$357.04
327
$15.00
$3.87
$3.27
$345.91
328
$15.00
$3.75
$3.17
$334.66
329
$15.00
$3.63
$3.06
$323.29
330
$15.00
$3.50
$2.97
$311.79
331
$15.00
$3.38
$2.86
$300.17
332
$15.00
$3.25
$2.75
$288.42
333
$15.00
$3.12
$2.65
$276.54
334
$15.00
$3.00
$2.53
$264.54
335
$15.00
$2.87
$2.42
$252.41
336
$15.00
$2.73
$2.32
$240.14
337
$15.00
$2.60
$2.20
$227.74
338
$15.00
$2.47
$2.08
$215.21
339
$15.00
$2.33
$1.97
$202.54
340
$15.00
$2.19
$1.86
$189.73
341
$15.00
$2.06
$1.73
$176.79
342
$15.00
$1.92
$1.62
$163.71
343
$15.00
$1.77
$1.50
$150.48
344
$15.00
$1.63
$1.38
$137.11
345
$15.00
$1.49
$1.25
$123.60
346
$15.00
$1.34
$1.13
$109.94
347
$15.00
$1.19
$1.01
$96.13
348
$15.00
$1.04
$0.88
$82.17
349
$15.00
$0.89
$0.75
$68.06
350
$15.00
$0.74
$0.62
$53.80
351
$15.00
$0.58
$0.50
$39.38
352
$15.00
$0.43
$0.36
$24.81
353
$15.00
$0.27
$0.23
$10.08
354
$10.19
$0.11
$0.09
$0.00
That’s right. It takes 354 months to payoff this debt. That’s 29.5 years. Not only does it take you almost three decades to finally rid yourself of the credit card ball and chain, but the $10,000 you borrowed winds up costing you $21,267. I don’t know about you, but I can think of a lot of things I’d rather do with $11,267 I paid in interest charges.
Take that same $10,000 CC debt and, instead of making the minimum payment, let’s say you make a fixed $300/month payment every month. Wanna know how long it takes to payoff the CC? 42 months, or 3.5 years. That’s 26 years sooner than the other option. Not to mention it saves you nearly $9,000 in interest payments.
Making the minimum payments on your high interest debt (when you have the ability to pay more) is just about the stupidest thing you could do…. ever.
Did you at any point fall victim to “minimum payments” with your high interest debt? Did you delay saving for retirement because you thought “There’s always tomorrow”? What do you find interesting about interest?
I learned my lesson about high interest rates and also late fees when I was young, broke, and in college.
When I got my first credit card offer at the age of 19, I thought ‘sweet’! Not only could I charge things on it, but I could also withdraw money! In my defense, I had to pay some medical bills on top of college, but I did also make the occasional frivolous expense. I also charged some of my grad school on a credit card because I had no choice if I wanted to go to school.
The good thing was, it was so painful to see that my minimum payments made so little of a dent in my balance that I was fiercely determined to pay it off once I got my job. It took me about a year to get out from under that debt, but I have never paid another cent in credit card interest since, and it has been almost 20 years.
I also learned to make sure I pay those bills on time, as late fees can also snowball, and you don’t even realize it until you get that next payment. Hopefully I will never need to charge something I can’t pay off that month again.
Memories!!!
Thankfully, my parents explained the “frenemy” that is interest when I got my first savings account at 6 years old and reinforced the wonders of compound interest for the next 10 years. I’ve paid interest for car loans and the mortgage, but I was able to skip a credit card interest horror story. I was lucky.
BTW, the illustrations and tables are being cut off on the right-hand side. Also, what interest rate is being cited for the savings table for a 25 year old vs a 35 year old?
I changed the table so hopefully it doesn’t get cut off any more. For the savings table investing the interest rate was 8% per year.
Thanks! I only asked since we started investing $5000 a year when I was 25 in a Roth IRA and I was comparing our actual return to the chart…sorry if it started a “but that isn’t possible” backlash…I was just being competitive with imaginary people. 🙂
No worries. Yeah 8% may be a stretch with the current market, but it’s not too far off from the historical average of the s&p
We’ve been invested for less than 3 years and are about even with that table (a little ahead), so I think 8% is a fine average. When I calculate for our future, I do it at 5% to be super safe, but 8% is usually the average used by most big-time money sites. 🙂
The big problem with your demonstration (and all others I have seen of its type) is that it completely ignores one of the most important factors of all, and that is inflation.
I can’t find an exact parallel to your first demonstration and I don’t want to compute it manually, but these examples should give some idea what I’m talking about:
$55,000 @7.125% for 35 years = $611705 unadjusted. Factor in 3% inflation and the value of your money after 35 years = $210646.
$55,000, same rate for 25 years = $3073560 unadjusted; but @3% inflation = $143525.
$80,000, same rate, 25 years = $447055 unadjusted; @3% inflation = $208763.
So by saving only $25,000 more for 10 years less, the person investing for 25 years comes out almost equal. That’s a lot smaller spread than your $55,000 vs. $150,000. By starting earlier, the person investing the smaller amount is actually at greater exposure to inflation.
Flip this over to a long-term debt like a mortgage, let’s say $250,000 @5%. Pay it for 30 years and your total is $429674 in nominal dollars; pay it for 15 years and your total is $332860. The 15-year clearly seems to win. But because of inflation the person paying for 30 years is paying with cheaper dollars over time. Adjust the nominal amounts for 3% inflation and your totals are $282823/30 yrs. and $267637/15 yrs., a difference of $15186 (or just $506 a year if divided by 30).
The demonstration was intended to show how compound interest works. Not to say this is what it would be like with fees, inflation, etc. I don’t think you’d disagree, the earlier one starts saving the better….right?
That would be true only if the value of money is absolute. On average over time, the value of money always is eroded by inflation. That’s why stocks have always been the most lucrative investments, because they have the greatest potential to outpace inflation. And why if you said you were earning $1965 a year, we’d both think you were not doing well – except that if you were earning $1965 in the year 1900, it would be equivalent to earning $50,000 in 2009. So I stand by my example that saving $55,000 for 35 years is roughly the same as saving $80,000 for 25 years. Just as interest compounds in a rising curve, so does inflation compound in a falling curve.
“That’s why stocks have always been the most lucrative investments, because they have the greatest potential to outpace inflation.” I find it funny that you leave out the other side of investing in stocks, you can lose your ass. But then again, most “financial advisers” leave that point out or put in it the micro fine print. They always say inflation will make you poor, but not the “proven” stock market.
You can lose your ass with almost any investment. Even FDIC-insured cash is not protected against inflation. And yes, if you buy individual stocks, if you hold them short-term in a taxable account (though there are tax protections if you sell at a loss), if you buy actively managed, high load funds, if you don’t diversify your asset classes, if you trade often and sell low – then you can lose your ass with stocks. On the other hand, the longer you hold stocks, the more likely they are to grow over the long term and to outpace inflation.
Have you seen the new credit card statements they have been sending out for the last 3 or 4 months? They are required to show each individual how long it will take to pay off your debt if you only make the minimum payment.
Similar to your point above its a long ass time.
No, I never got caught in the minimum payment trap. Like another commenter, I got my first credit card in college at the age of 19. But, I never understood how people would act like using a credit card was “free” money. Everyone knows you have to pay it back.
When I first moved away from home, I used credit cards as needed, but always used my income tax return to pay off any remaining balance from the year. So, the credit card trap never got me.
Hi Debt Ninja,
I am confused as to why there is such a big jump in the interested gained after one year in the savings plan. I read that it is an 8% savings rate but the jump still seems rather high. Can you clarify? Thanks!
Did you miss that there is also a $5,000 contribution each year? That may be why you are confused. Its 8% interest plus a $5,000 contribution. Hope that clarifies.
The one issue I see with the first chart is that you don’t always benefit from 8% interest, even when averaged out over 35 years. Take the last 15 years, for example. I invested $17,000 in mutual funds when I was 26 years old. After 15 years, that same fund today equals $18,000. Based on an average 8% return, it SHOULD eequal $53,926 today. I would have to be getting astronomical interests rates to get the growth I’d need to achieve an average of 8% per year from age 26 to 60. I’m currently 44 yrs old so only have 16 years left to compound to age 60. I’m really not expecting that original investment to equal the $232,732 that an 8% yearly return would have provided. Granted, I’m not the most savvy investor… far from it, but I’d bet that a great deal of people are in the same investment boat as I. Perhaps it was just the luck of having my investment years suffer under the pressure of a weak economy? I’m certainly not alone, I’m sure.
A lot depends on the fees and expenses associated with your fund and how well you are diversified. If your fund has sales loads, high expense and turnover ratios, 12b-1 charges, etc., or if it’s in a taxable account and you’ve incurred capital gains, these charges are all eating into your net returns.
I don’t know if an 8% interest rate is obtainable either (I think it could be), but the purpose was to show compound interest. It works the same regardless of what the interest rate is, just the overall totals would be lower if it was 5% or 3%
When I saw this post I was afraid I’d be the only one to say it, investing is gambling. The numbers seem to be always manipulated to provide a staggering rate of return in order to perpetuate the herd mentality to put your money into the stock market or any other investment. I’d rather lose money via inflation than money from a bad stock pick, mutual fund, bond, etc.
I wont disagree that rates of return can vary greatly year to year, but I think it’s pretty hard to deny the performance of the stock market as a whole over it’s history. I mean there is no other investment out there that beats it. Yes investing is gambling, but I think the bigger gamble is not investing in the market.
I hear you. I just don’t think most people understand that the risk of losing money is there. They seem to focus on the “I will be rich if I do this” number. Most people consider me bitter with the stock market. It’s true. I did feel suckered into it and I lost big. I hope my experience would open their eyes to the possibility of actually getting a negative rate of return when it comes to investing. Maybe I should change my alias to ParanoidInvester 🙂
Good points. It’s always important to remember every dollar you put in to the market could disappear. Sometimes we, including myself, forget this and are shocked when the markets take a tumble.
I agree with our esteemed host. As a friend wrote to me via e-mail some years ago:
“In the short run, volatility risk is the biggest risk, but in the long run inflation is by far the biggest risk you face.
“A portfolio more heavily weighted in fixed income will inevitably have a lower long term return than one more heavily weighted in stocks. Over time, the short-term high volatility risk of stocks is rewarded with higher long-term returns, and the short-term low volatility risk of fixed income securities is penalized with lower long-term returns. This is a constant trade-off you must weigh. Just rememeber that decreasing your exposure to volatility risk (less stock, more bonds), increases your exposure to
inflation risk and vise versa.
“The problem is inflation is invisible, and the volatility of your portfolio isn’t. For example many people would prefer to see their portfolio gain 5%
in a 15% inflationary period, than see their porfolio drop 5% in a 3% inflationary period. In the first example the net real loss is 10% vs. 8% in the second example, but it appears to be less damaging because the porfolio increased in gross value and the other decreased.
“Volatility risk is the most visable, but it isn’t the biggest risk you face. Over time, inflation is your #1 enemy, not the volatilty of the market. In fact, the volatility of the market is your friend – it allows long-term returns above inflation to be possible.”
I do feel like the people that only pay the minimum do not understand the consequences. Hopefully with the new credit card rules and statements now they can see jsut how dumb it is. (500$ took me 3 years if i only paid the minimum)
Doubling my student loan payments now, will help me in the long run. It would be so much nicer to just pay $50 bucks towards a loan then paying $200. But I know in the long run I will save so much more money later. P.S. Justin Bieber’s song Baby is my ringtone.
I definitely agree with the last poster. I tried to at LEAST double my minimum payment on my student loan. Of course I could have spent or saved that money in other ways but I think it was best to pay it off. Saved a ton in interest paying it off in 11 months (not including grace period) compared to the 114 months it would have taken paying the minimum!!
I’d be 33 still paying off my loans. Now I’m 24 and just about debt-free.
I would agree with Girl Makes Cents, getting out of debt is a lot like being on a diet. The first payment is scary and sucks. But then you start seeing results and it encourages you to to achieve your goal of being debt free faster.
Love the diet analogy
I’m like the TFLN of analogies…kidding…maybe…
It’s not just about the math I’m afraid. I dated a guy who got a perfect score on his math SAT’s and still loved racking up the credit card debt. Because he was smart, he felt like he was entitled to a nicer lifestyle than he could afford.
I, by the way, find dieting WAY Harder than paying down debt. Yet, I do see similarities. I consume plenty..in both calories and spending. I usually keep my weight down more as a result of exercise and less because of calorie restriction. Similarly, with PF, I tend to earn more than I need and that keeps the budgeting relatively simple. Now I know you or someone wrote about Nick Cage filing bankruptcy, but spending less than you make is a lot easier when you’re making six figures vs 20K/year.
PS. I didn’t even know who Justin Bieber was until you started posting incessantly about him. So, do 20 somethings still watch the Disney channel or something? Are you secretly watching Hannah Montana in your spare time? PTIF readers want to know.
I can not confirm nor deny the Hannah Montana comment. Although I may or may not have a singing Hannah Montana pen and a Hannah Montana calendar above may desk right now.
Dear Ninja, I appreciate your calculations for predictions. It’s something I’m trying to do myself. It would be awesome for the the CC repayment to be in an embedded Google Spreadsheet, for example.
How is the minimum payment calculated?
The last lines make me wonder what’s up with the ‘principle paid’ column. As I understand it, principle paid for months 353 and 354 aught to be 14.73 and 10.08, respectively.
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The interesting thing about interest, is that it acts as our frenemy (friend/enemy). It’s often a major player in wealth building, but also one of the driving forces behind the ‘paycheck-to-paycheck’ lifestyle. It can work for or against you. The choice is yours.
Pretty crazy stuff, huh? The younger dude only invested for 11 years, but came out with a butt-load more money than the older dude. It just goes to show that interest can be your best friend, especially when you have time on your side, but as Newton’s 3rd Law of Motion says: “To every action there is an equal and opposite reaction”
I learned my lesson about high interest rates and also late fees when I was young, broke, and in college.
When I got my first credit card offer at the age of 19, I thought ‘sweet’! Not only could I charge things on it, but I could also withdraw money! In my defense, I had to pay some medical bills on top of college, but I did also make the occasional frivolous expense. I also charged some of my grad school on a credit card because I had no choice if I wanted to go to school.
The good thing was, it was so painful to see that my minimum payments made so little of a dent in my balance that I was fiercely determined to pay it off once I got my job. It took me about a year to get out from under that debt, but I have never paid another cent in credit card interest since, and it has been almost 20 years.
I also learned to make sure I pay those bills on time, as late fees can also snowball, and you don’t even realize it until you get that next payment. Hopefully I will never need to charge something I can’t pay off that month again.
Memories!!!
Thankfully, my parents explained the “frenemy” that is interest when I got my first savings account at 6 years old and reinforced the wonders of compound interest for the next 10 years. I’ve paid interest for car loans and the mortgage, but I was able to skip a credit card interest horror story. I was lucky.
BTW, the illustrations and tables are being cut off on the right-hand side. Also, what interest rate is being cited for the savings table for a 25 year old vs a 35 year old?
I changed the table so hopefully it doesn’t get cut off any more. For the savings table investing the interest rate was 8% per year.
Thanks! I only asked since we started investing $5000 a year when I was 25 in a Roth IRA and I was comparing our actual return to the chart…sorry if it started a “but that isn’t possible” backlash…I was just being competitive with imaginary people. 🙂
No worries. Yeah 8% may be a stretch with the current market, but it’s not too far off from the historical average of the s&p
We’ve been invested for less than 3 years and are about even with that table (a little ahead), so I think 8% is a fine average. When I calculate for our future, I do it at 5% to be super safe, but 8% is usually the average used by most big-time money sites. 🙂
The big problem with your demonstration (and all others I have seen of its type) is that it completely ignores one of the most important factors of all, and that is inflation.
I can’t find an exact parallel to your first demonstration and I don’t want to compute it manually, but these examples should give some idea what I’m talking about:
$55,000 @7.125% for 35 years = $611705 unadjusted. Factor in 3% inflation and the value of your money after 35 years = $210646.
$55,000, same rate for 25 years = $3073560 unadjusted; but @3% inflation = $143525.
$80,000, same rate, 25 years = $447055 unadjusted; @3% inflation = $208763.
So by saving only $25,000 more for 10 years less, the person investing for 25 years comes out almost equal. That’s a lot smaller spread than your $55,000 vs. $150,000. By starting earlier, the person investing the smaller amount is actually at greater exposure to inflation.
Flip this over to a long-term debt like a mortgage, let’s say $250,000 @5%. Pay it for 30 years and your total is $429674 in nominal dollars; pay it for 15 years and your total is $332860. The 15-year clearly seems to win. But because of inflation the person paying for 30 years is paying with cheaper dollars over time. Adjust the nominal amounts for 3% inflation and your totals are $282823/30 yrs. and $267637/15 yrs., a difference of $15186 (or just $506 a year if divided by 30).
The demonstration was intended to show how compound interest works. Not to say this is what it would be like with fees, inflation, etc. I don’t think you’d disagree, the earlier one starts saving the better….right?
That would be true only if the value of money is absolute. On average over time, the value of money always is eroded by inflation. That’s why stocks have always been the most lucrative investments, because they have the greatest potential to outpace inflation. And why if you said you were earning $1965 a year, we’d both think you were not doing well – except that if you were earning $1965 in the year 1900, it would be equivalent to earning $50,000 in 2009. So I stand by my example that saving $55,000 for 35 years is roughly the same as saving $80,000 for 25 years. Just as interest compounds in a rising curve, so does inflation compound in a falling curve.
“That’s why stocks have always been the most lucrative investments, because they have the greatest potential to outpace inflation.” I find it funny that you leave out the other side of investing in stocks, you can lose your ass. But then again, most “financial advisers” leave that point out or put in it the micro fine print. They always say inflation will make you poor, but not the “proven” stock market.
You can lose your ass with almost any investment. Even FDIC-insured cash is not protected against inflation. And yes, if you buy individual stocks, if you hold them short-term in a taxable account (though there are tax protections if you sell at a loss), if you buy actively managed, high load funds, if you don’t diversify your asset classes, if you trade often and sell low – then you can lose your ass with stocks. On the other hand, the longer you hold stocks, the more likely they are to grow over the long term and to outpace inflation.
Have you seen the new credit card statements they have been sending out for the last 3 or 4 months? They are required to show each individual how long it will take to pay off your debt if you only make the minimum payment.
Similar to your point above its a long ass time.
No, I never got caught in the minimum payment trap. Like another commenter, I got my first credit card in college at the age of 19. But, I never understood how people would act like using a credit card was “free” money. Everyone knows you have to pay it back.
When I first moved away from home, I used credit cards as needed, but always used my income tax return to pay off any remaining balance from the year. So, the credit card trap never got me.
Hi Debt Ninja,
I am confused as to why there is such a big jump in the interested gained after one year in the savings plan. I read that it is an 8% savings rate but the jump still seems rather high. Can you clarify? Thanks!
Did you miss that there is also a $5,000 contribution each year? That may be why you are confused. Its 8% interest plus a $5,000 contribution. Hope that clarifies.
The one issue I see with the first chart is that you don’t always benefit from 8% interest, even when averaged out over 35 years. Take the last 15 years, for example. I invested $17,000 in mutual funds when I was 26 years old. After 15 years, that same fund today equals $18,000. Based on an average 8% return, it SHOULD eequal $53,926 today. I would have to be getting astronomical interests rates to get the growth I’d need to achieve an average of 8% per year from age 26 to 60. I’m currently 44 yrs old so only have 16 years left to compound to age 60. I’m really not expecting that original investment to equal the $232,732 that an 8% yearly return would have provided. Granted, I’m not the most savvy investor… far from it, but I’d bet that a great deal of people are in the same investment boat as I. Perhaps it was just the luck of having my investment years suffer under the pressure of a weak economy? I’m certainly not alone, I’m sure.
A lot depends on the fees and expenses associated with your fund and how well you are diversified. If your fund has sales loads, high expense and turnover ratios, 12b-1 charges, etc., or if it’s in a taxable account and you’ve incurred capital gains, these charges are all eating into your net returns.
I don’t know if an 8% interest rate is obtainable either (I think it could be), but the purpose was to show compound interest. It works the same regardless of what the interest rate is, just the overall totals would be lower if it was 5% or 3%
When I saw this post I was afraid I’d be the only one to say it, investing is gambling. The numbers seem to be always manipulated to provide a staggering rate of return in order to perpetuate the herd mentality to put your money into the stock market or any other investment. I’d rather lose money via inflation than money from a bad stock pick, mutual fund, bond, etc.
I wont disagree that rates of return can vary greatly year to year, but I think it’s pretty hard to deny the performance of the stock market as a whole over it’s history. I mean there is no other investment out there that beats it. Yes investing is gambling, but I think the bigger gamble is not investing in the market.
I hear you. I just don’t think most people understand that the risk of losing money is there. They seem to focus on the “I will be rich if I do this” number. Most people consider me bitter with the stock market. It’s true. I did feel suckered into it and I lost big. I hope my experience would open their eyes to the possibility of actually getting a negative rate of return when it comes to investing. Maybe I should change my alias to ParanoidInvester 🙂
Good points. It’s always important to remember every dollar you put in to the market could disappear. Sometimes we, including myself, forget this and are shocked when the markets take a tumble.
I agree with our esteemed host. As a friend wrote to me via e-mail some years ago:
“In the short run, volatility risk is the biggest risk, but in the long run inflation is by far the biggest risk you face.
“A portfolio more heavily weighted in fixed income will inevitably have a lower long term return than one more heavily weighted in stocks. Over time, the short-term high volatility risk of stocks is rewarded with higher long-term returns, and the short-term low volatility risk of fixed income securities is penalized with lower long-term returns. This is a constant trade-off you must weigh. Just rememeber that decreasing your exposure to volatility risk (less stock, more bonds), increases your exposure to
inflation risk and vise versa.
“The problem is inflation is invisible, and the volatility of your portfolio isn’t. For example many people would prefer to see their portfolio gain 5%
in a 15% inflationary period, than see their porfolio drop 5% in a 3% inflationary period. In the first example the net real loss is 10% vs. 8% in the second example, but it appears to be less damaging because the porfolio increased in gross value and the other decreased.
“Volatility risk is the most visable, but it isn’t the biggest risk you face. Over time, inflation is your #1 enemy, not the volatilty of the market. In fact, the volatility of the market is your friend – it allows long-term returns above inflation to be possible.”
I do feel like the people that only pay the minimum do not understand the consequences. Hopefully with the new credit card rules and statements now they can see jsut how dumb it is. (500$ took me 3 years if i only paid the minimum)
Preferred Financial Services
Doubling my student loan payments now, will help me in the long run. It would be so much nicer to just pay $50 bucks towards a loan then paying $200. But I know in the long run I will save so much more money later. P.S. Justin Bieber’s song Baby is my ringtone.
I definitely agree with the last poster. I tried to at LEAST double my minimum payment on my student loan. Of course I could have spent or saved that money in other ways but I think it was best to pay it off. Saved a ton in interest paying it off in 11 months (not including grace period) compared to the 114 months it would have taken paying the minimum!!
I’d be 33 still paying off my loans. Now I’m 24 and just about debt-free.
I would agree with Girl Makes Cents, getting out of debt is a lot like being on a diet. The first payment is scary and sucks. But then you start seeing results and it encourages you to to achieve your goal of being debt free faster.
Love the diet analogy
I’m like the TFLN of analogies…kidding…maybe…
It’s not just about the math I’m afraid. I dated a guy who got a perfect score on his math SAT’s and still loved racking up the credit card debt. Because he was smart, he felt like he was entitled to a nicer lifestyle than he could afford.
I, by the way, find dieting WAY Harder than paying down debt. Yet, I do see similarities. I consume plenty..in both calories and spending. I usually keep my weight down more as a result of exercise and less because of calorie restriction. Similarly, with PF, I tend to earn more than I need and that keeps the budgeting relatively simple. Now I know you or someone wrote about Nick Cage filing bankruptcy, but spending less than you make is a lot easier when you’re making six figures vs 20K/year.
PS. I didn’t even know who Justin Bieber was until you started posting incessantly about him. So, do 20 somethings still watch the Disney channel or something? Are you secretly watching Hannah Montana in your spare time? PTIF readers want to know.
I can not confirm nor deny the Hannah Montana comment. Although I may or may not have a singing Hannah Montana pen and a Hannah Montana calendar above may desk right now.
Dear Ninja, I appreciate your calculations for predictions. It’s something I’m trying to do myself. It would be awesome for the the CC repayment to be in an embedded Google Spreadsheet, for example.
How is the minimum payment calculated?
The last lines make me wonder what’s up with the ‘principle paid’ column. As I understand it, principle paid for months 353 and 354 aught to be 14.73 and 10.08, respectively.
Could you clear this up? Thanks! 🙂