Hello there and welcome to Episode 8 of the InformedDecisions.ie Blog. Heading for double figures, will we make it to #10, l certainly hope so!
Speaking of hope, we saw how the snow-ball last week grew from 1kg to 13,780kg over the course of a 100 mile journey (dodgy segway #1!). Compound Interest got a bit of attention in that blog (click here), and I promised to get more 'figurey' this week, so lets jump in.
You have a financial goal identified, is it fair to say that you will need to accumulate a substantial fund in order to help you realise it? If so, lets see how the mushrooming impact of compound interest can help you reach that goal!
Lets say you want to accumulate a pot of €200,000 in 30 years time?
If I was to tell you that saving a fraction over €200 per month, assuming you achieve 6%p.a (we'll see how this is done in later episodes), you will have accumulated a pot of €200,000 Gross.
The amazing part of this is of that 200k only €72k (37%) will be money that you actually saved yourself, the remainder (63%) was interest accrued, so your interest was a mushroomy €128,000. Happy Days!
Nothing Added But Time:
Another scenario, lets say you saved the same amount, €200 per month, but did it over 15 years, would you achieve a pot of €100,000, given it is half the term of above? Eh, No!
You would have a terribly fungal total of €57,000! Of that you paid in €36k (half of the €72k above), but the interest was only €21k.
Why? Because you cut the time of growth to shreds! Mushrooms grow and feed off other things, let your interest grow on your money, leave it do it's thing.
There's a stock industry line that is trotted around on this topic; 'its time in the market not timing the market'. We'll have more on this in future blogs.
I trust that you get a fair sense of the importance of starting early (or if your an older mushroom yourself then starting as early as you can!), and being consistent with it, in order to accumulate a required pot of money. I have deliberately kept above examples simple, not taking into account likes of indexation, taxation, fees etc. The principal is the key message this week.
The often complex Pension, Investment and Savings Products that have been created over the decades are merely tools to try and achieve the above outcomes of amassing a sum of money, some do it better than others. The end goal of amassing a sum should always be the key driver of your behaviour.
Next week we'll have a look at how the inverse of the above examples impacts on one's mortgage, and how you can de-mushroom it!
Thanks for reading, sharing, liking, disagreeing, debating, slating and sharing the love!