The Power of Compound Interest Vs. The Power of Money!

So let’s say you’ve just started working and you discover your company offers a 401(k) plan, which is a long-term savings account with your company. Many companies auto-enroll their employees, but most do not—offering the worker the choice of enrolling now or later. If you possess a cursory knowledge of basic compounding, you should understand this example very clearly:

Consider two workers as they enter the workforce:

Worker A is an engineer at Deferred Gratification Ltd., who begins immediately contributing to his 401(k) at 25—he contributes $3600/yr – That’s $300/month for 10 years--and stops contributing at 35. We assume of course that he can contribute $300/month and contributes no more than this, even if he receives raises (and can have a little fun). He contributes nothing else until retirement.

Worker B, (a former roommate) starts at Slacker Inc, but decides that he can get serious about investing later—like 10 years later. Now that he has a family on the way, Mr. Slacker realizes at 35 that he’s done playing around so much and wants to get serious. Very serious. He starts dumping 10,000/yr into his 401(k) – a whopping 833.33 a month, every month, until he retires.

Which worker do you think will be better of at retirement of 60 years old? Consider the investment strategy—Worker A invested a total of 36,000—3,600 over 10 years, and completely stopped at 35 and spent the remaining 25 years spending however he pleased. Worker B invested a total of $250,000 over 25 years. That’s a quarter of a million bucks, which is very hard to come by for even the most wealthy middle-classers.

I won’t keep you in suspense any longer, but you probably already know how it’s going to turn out. Turns out Slacker Guy didn’t do too badly. All that saving paid off, and our Slacker ended up with about 757,000. But Worker A also did well with 768,000—11,000 more than the other guy, and 214,000 less invested! Truly, the power of compound interest is at play. The more time that the money has to collect interest, the less the amount invested really matters. The Table below shows the year-by-year accumulation of each worker. (WARNING--If you are reading this in Facebook, the table below will not format correctly; click "view original post" to go directly to this blog and view the table.)

Age	Worker A	Worker B	Difference
25	3,000.00	0	3,000.00
26	7,260.00	0	7,260.00
27	11,946.00	0	11,946.00
28	17,100.60	0	17,100.60
29	22,770.66	0	22,770.66
30	29,007.73	0	29,007.73
31	35,868.50	0	35,868.50
32	43,415.35	0	43,415.35
33	51,716.88	0	51,716.88
34	60,848.57	0	60,848.57
35	70,893.43	10,000.00	60,893.43
36	77,982.77	17,600.00	60,382.77
37	85,781.05	25,960.00	59,821.05
38	94,359.15	35,156.00	59,203.15
39	103,795.07	45,271.60	58,523.47
40	114,174.58	56,398.76	57,775.82
41	125,592.03	68,638.64	56,953.40
42	138,151.24	82,102.50	56,048.74
43	151,966.36	96,912.75	55,053.61
44	167,163.00	113,204.02	53,958.97
45	183,879.30	131,124.43	52,754.87
46	202,267.23	150,836.87	51,430.36
47	222,493.95	172,520.56	49,973.39
48	244,743.34	196,372.61	48,370.73
49	269,217.68	222,609.87	46,607.80
50	296,139.45	251,470.86	44,668.58
51	325,753.39	283,217.95	42,535.44
52	358,328.73	318,139.74	40,188.99
53	394,161.60	356,553.72	37,607.89
54	433,577.76	398,809.09	34,768.68
55	476,935.54	445,290.00	31,645.54
56	524,629.09	496,419.00	28,210.10
57	577,092.00	552,660.90	24,431.11
58	634,801.20	614,526.98	20,274.22
59	698,281.32	682,579.68	15,701.64
60	768,109.45	757,437.65	10,671.80
Invested:	39,600.00	250,000.00

Which brings us to one of the most primary lessons in investing—you don’t have to be rich to get started nor know too much of anything about stocks and bonds and which to buy. Starting out by participating in your company’s 401(k) plan is a great first step to getting on the road to true financial success. Once you’ve gotten the personal finances under control, you can start concentrating fully on the investing part. And the earlier you start the better!

The Crash and The Shift

Good evening readers,

THE CRASH
My apologies for not posting for awhile. Unfortunately, all of the articles I have been working on were lost in a fatal hard drive crash last week. Operators are currently assessing the feasibility of recovering what we can from the wreckage but it looks bleak. We'll see

THE SHIFT
However, I am in the middle of being relocated to the ATL from NYC on a short-term basis. Please bear with me and continue to visit the site and perhaps catching up on articles. This will also denote a marked shift as we move from Personal Finance to Investing Principles. Understand of course that I will regularly re- visit Personal Finance topics from time-to-time, but I want to go in a slightly different direction.

Next post should be up this weekend.

Take Care,

Charles

The Consumer-Creditor War

Mafia Billionaires Take the Battlefield

Earlier I hinted in a previous article about the growing number of American consumers who are paying their credit cards off in larger numbers. It appears, from this article, that now the Credit Card Mafia is going on the offensive. That’s right—many of the largest creditors in the Nation (and undoubtedly the world) are losing money because people are paying off the cards are high payment rates, despite the fact that the Fed has increased rates.

Let me explain. When the fed raises interest rates, credit card companies also charge higher rates. They add this rate adjustment to the prime rate…which is…HEY! WAKE UP! Sorry about that, I almost went into a boring interest-rate conversation. Just know that they’re worried. Look what Richard Srednicki at J.P. Morgan had to say about it:

“It is a tougher business if payment rates continue to stay up and consumers continue to pay off more. It's something we've got to understand and work at." (Emphasis Mine).

That’s right. In other words, the gloves are off and they’re ready to go to war. For once, the statistics did not predict people to continue to pay off cards in high numbers at high interest rates. Granted, Americans continue to use credit cards and are in deeper debt than ever (I have to emphasize that). But this can still be viewed as a victory (albeit a small one) for the American consumer.

Hopefully, as Americans become more informed about the true risk-reward system of the credit card, they can make more responsible choices. Many are financing their credit card debt against their homes; others are playing the balance-transfer game where they simply move their card debt to a lower interest-rate card. When the government introduced the new credit-card bill (with help form the Mafia lobbyists) that doubled the minimum-payment requirements, payment levels increased!

So those are the tools that the American consumer is using on the battlefield. So what are the credit card companies doing?

Card issuers are trying to replace lost interest revenue by increasing late-payment fees and raising interest rates for customers unable to pay their bills in full. In an effort to build customer loyalty and increase spending, issuers have launched a slew of new cards and have introduced new checkout-counter technologies to encourage more card use. (Emphasis Mine). Source is here

Apparently, multibillionaire companies come wit’ it when its time for a battle. Have you use the Paypass machine yet? If you pay off your balance off every month, are you using the best card (hopefully not with an annual fee?) It’s my hope that you’re on the lookout when it comes to using the credit card. If you are wary of how they can help (and definitely hurt) you, just be careful. Oh, and make sure your chin strap is on tight—your out against the most ruthless and well-funded adversary in the consumer industry. Meanwhile, I’ll make sure to fly over and keep reporting to you how things are going.

Focus. Now!

Focus is the driver that separates those who accomplish their goals from those who "are getting ready to do it real soon." Let's examine a suggested way we can help you acheive your financial goals any day now!

Praise the Lord.

That was the first thing I said aloud after I clicked submit and sent the last $85 of the $2,374 in credit card debt incurred in moving to the New York area. That was May 22, 2006. The day I no longer owed a credit card company, student loan, nobody. Granted, I’m in the City which means I don’t need a car, and I’m currently renting so I have no home equity either, and I had no student loans when I graduated, but from this point on the Mafia and I are square. Inspection of my wallet however will probably turn up the credit card I’ve been using—rather used. I’m not a fan of credit cards, but until my Emergency Fund is completed, it’s all I have. Strangely, no emergencies have come yet (knocking on fake wood desk..well, actually my dresser—I’m getting another desk soon so I have to bootleg it for now).

However, there were no corks popped, not even in my mind. Probably because I’ve seen this day coming for so long it’s been kind of uneventful. Enough about my own horn, though. Today we’re here for a good conversation on perseverance and focus. For those of you who want to get out of debt, for those of you who don’t open bills when they arrive (!!!), today is a good day to change that.

Focus is not an abstract idea—it’s actually very doable but it will require discipline. If eliminating a debt is your above-all goal, then nothing else can trump that. If building your emergency fund is your goal, then nothing short of the Apocalypse should stop you. Specific goal-setting, as I’ve written about before, is the key to developing your focus. Specifics come from writing or typing your goals out and backtracking. Lack of focus is what keeps otherwise smart and well-meaning people from starting a task they want to do, and is also what makes them fail to complete it. That’s because you need more than specifics.

Goal setting must also be measurable. For instance, if you’d like to lose weight, a specific goal may be “I’d like to lose weight by November 1st.” This is a time-set goal. However, it must also be measurable—how much weight would you like to lose? 15 pounds? If so, you should break it out accordingly: “I’d like to lose 25 pounds by Thanksgiving.” Then backtrack—break it down to reasonable time periods. If you started on June 1^st, that would give you five months, which means you would have to lose an average of 5 pounds per month, which is much easier than trying to lose 25 pounds all at once. Then you’d make a nice chart and place it somewhere where you would see if often and it would mark your progress based on your average:

GOAL: Lose 25 pounds by November 1^st

Current Weight: 175lbs. Target Weight: 150 lbs

Month	Target Weight	Actual Weight
June 30th	170	173
July30	165	167
August 30	160	160
September 30	155	155
October 30	150	149.5

Focus is the driver that would keep you going. What if you want to go out to eat with friends at that new restaurant in town? Can you keep towards your goal? Are you monitoring yourself weekly to make sure you’re maintaining? After seeing you’re progress month after month, you’ll find yourself working to keep towards you’re targets. Even if you fall a little short of your wanted goal sometimes it’s OK if you’re focus is honestly honed toward completing the task. A similar approach can be used if your goal is to save money or pay off debts.

Let’s say that you have a credit card balance of say $5000. Speculate about how long that it would take you to pay that off, being mindful of your income. Keep in mind that serious people can pay off about 5G’s in less than 18 months. So if you can do it in 18, then your payment is about $280 a month. (Just imagine how long it would take it you only paid $40/month).This means while you’re eliminating the debt you have to take an L on (meaning delay the purchase of) the new 200X One-Upmanship LX Coupe. Expensive dinners are out. Remember, focus is the key, and the quicker you get rid of the debt, the quicker you can consider taking your sweetheart out to Chez L’argent.

If you’re not willing to take on accelerated payments, then be prepared to be a slave to the lender for as long as it takes before you snap out of it. The cars, the vacations, etc. will always be there and you won’t “miss out” on the fun if you don’t get serious now. So identify your goal, and focus. Not tomorrow either. Today. Maybe after you finish reading this article you’ll open up Microsoft Word, Excel, or grab a notebook and begin writing specific and measurable goals with specific (and reasonable) completion dates and you will pace yourself. I sense it happening! I see ya out there playa. Now get to work. Now.