Krista Paras
Time + compound interest = lots of money. Benjamin Franklin understood this concept all the way back in the 1700s. In his will, Benjamin left a little around $5,000 dollars for Boston, and another $5,000 for Philadelphia. However, this money came with a catch; In order to show the time value of money, Benjamin said that the cities weren’t allowed to use this money for a hundred years, and after this, they had to leave 25% of what they had for another 100 years. From 1790 to 1890, the sums of money grew to $400,000 and $100,000 (the cities used different investment strategies). From here, the cities saved 25% of what they had saved for another 100 years. By 1990, the sums had grown exponentially. The leftover $100,000 and $25,000 became $4,500,000 and $2,000,000 in the span of 100 years. As you can see from this story, having some patience when it comes to money can really pay off. For another example, we can look at the image to the image to the right, (which might look familiar because it was in the first article we read this year) it shows how much of a difference starting early for retirement savings makes. You can see by investing $250 a month starting at 25 you’ll end up with $878,570, but at when starting at age 45, you only save $148,236. This is a $730,334 difference! According to Synchrony Bank, “ [The] ‘rule of thumb’ given by some financial experts on how much individuals should be saving for a goal of retiring by age 67:
Americans in their 30s: 1–2 times their annual salary
Americans in their 40s: 3–4 times their annual salary
Americans in their 50s: 6–7 times their annual salary
Americans in their 60s: 8–10 times their annual salary”
According to this quote, because the median US salary is about $45,000, by the time we retire, we should have at least $360,000 to $450,000. However, by retirement age, the median person only has about $170,000 saved, which isn't nearly enough! All in all, it is important to start saving money early on, so due to compound interest, we can end up with hundreds of thousands of dollars saved for retirement.
Works Cited
Frankel, Matthew, and Cfp. “The Average American Has This Much Saved for Retirement -- How Do You Compare?” The Motley Fool, The Motley Fool, 21 Mar. 2016, www.fool.com/retirement/general/2016/03/21/the-average-american-has-this-much-saved-for-retir.aspx.“Investing in the Future, 200 Years in the Past.” The New York Times, The New York Times, 10 Sept. 2015, www.nytimes.com/paidpost/franklin-templeton/investing-in-the-future-200-years-in-the-past.html.
Lieber, Ron. “A Financial Checklist for Your Newly Minted High School Graduate.” The New York Times, The New York Times, 31 May 2019, www.nytimes.com/2019/05/31/your-money/teenager-financial-preparation.html.
“What's the Median Retirement Savings by Age?” Synchrony Bank, Synchrony Bank, 25 Sept. 2019,
https://www.synchronybank.com/blog/median-retirement-savings-by-age/
You had a lot of good points here! This reminds me of this one infographic that showed two guys. One of them invested $2,000 a year starting at 18 and stopping at 24. The other started at 24 and continued putting in $2,000 for decades, but never caught up to the first because of compound interest. This is a good reminder to those of us who are about to start college, knowing just how important it is to start out with our best financial foot forward. This was well researched and you seem pretty passionate about the topic. Well done!
ReplyDeleteThis is always very interesting to think about, especially when you consider the fact that inflation is another factor in this. I remember reading about a couple of centuries ago about all the things you could buy with $10, and it is a lot more than you can today. This is also very different because I feel as though not many people know about this fact/story. It's a good way to highlight the importance of investing with an interesting historical tidbit that is still continuing on today.
ReplyDeleteThis is an incredibly relevant topic. The approximate average age Americans live to now is 79, according to World Bank. Based on your statistics, this means that average Americans must like around 12 years with their saved retirement money. The idea that the average savings is only $170,000 is astounding. This means that people must live an average of 12 years with $14,000/year to live with. This is an extremely daunting task, and very difficult burden that our elders now have the reality of living with. Now, we must learn from their mistakes, and learn from Ben Franklin. Invest your money, and use time as a tool.
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ReplyDeleteI agree with your statement that investing and saving money for retirement is a vital financial concern, however, the reality is that it is often extremely difficult for the average young American to put aside even $250 a month. There are a variety of expenses that come into play (like rent, student loans, car payments, etc) that result in people living pay check to pay check with little leftover to save. Sure, every little bit helps, but do you think that there are other ways that those struggling financially can invest (and do so effectively)?
ReplyDeleteI agree that we need to invest our money in order to profit more, however with taxes and increased living wages it becomes harder and harder to save money and people have to live paycheck to paycheck in order to stay where they are at. The minimum wage in Wisconsin is 7.25 meanwhile the average living wage is 10.10. The reality is we need to either lower living wages or get paid to the living wage in order to invest more and hopefully have enough for retirement.
ReplyDeleteThis was interesting to read. Yes time is very valuable when it comes to investing, but it also is hard for people to put away money at a young age. This cause the problem of starting a retirement fund too lat and not having enough money to actually retire, thus making it so you have to keep working.
ReplyDeleteI agree with your point that Americans should be contributing and starting to invest as soon as possible. It was interesting how even 200 years ago, a influential founding father of our country knew that investing will each us a larger sum of money in the end. I think that in our society it is hard for young Americans to set a portion of their income into some sort of investing account because either they want to spend all of the money on either meaningful purchases or even on impulse buys. Young adults are looking for ways to have fun now, and their are not interested in savings for the future. They should in the end think about how putting your money away either in a risky or non risky way, no matter how little or how much you first invest.
ReplyDeleteI agree that not only Americans but also other people need to start saving earlier. Its rather shocking that Benjamin Franklin knew how much power interest would have. For being so long ago you would believe that people would catch on to saving more. Which this brings up a good question has past civilizations who where advanced also knew the power of anything over time. It seems like everyone wants immediate gratifications for things which are acquired over time. Its just something to think about overall its good explaining the basics.
ReplyDeleteLove the topic, and really encourages me to start saving right now, but you mentioned to throw $250 a month into investments and peoples average annually wage is $45,000 that might be a little to much money for people to invest. Anyway I agree with a lot of your points and it was a great and interesting paper to read.
ReplyDeleteI agree that saving money is important to start as young as 18, but I would argue that saving even before that would be easier to do. It would be much easier for teens in high school to put aside their most salaries from part time jobs into savings until they head off to college, than adults to put aside amounts close to $2000 per month. That money saved is not required to go to retirement, while that is something you should save for, that money can also go towards paying off student debt or a down payment on a house.
ReplyDeleteThis is a topic that is so interesting and so important in life. Compound interest is such a huge tool when it comes to saving money because it's not just saving, it is literally growing your money into more than you had. And it is such a valuable and simple thing to do by setting up a savings account with interest or a CD account.
ReplyDeleteDo you think that there will be new programs produced in the near future that will help the newer generations in saving their money given the current market? If this trend continues, Americans could have less money when they retire than what they had while working! Also do you think that this issues stems from the mindset of Americans or our current government/economy? Personally, I believe that it is a mixture of the two causing these problems in saving for retirement.
ReplyDeleteI agree it is very important to start saving money at an early age. It is hard to realize just how important it is at the current time and some people will not save up money and regret it. We just put a bigger emphasis on our kids next time that it is a great idea to save money so that they will have it in the future, so they will be ready and prepared when it comes time to retire. People also need to spend a lot of time working and going to their job, and it is more difficult to do so if you have a family in place and you want to see your kids. It is crazy to think the average person only has $170,000 saved up and the need to more than double that to get the best outcome for retirement.
ReplyDeleteThis is very interesting to see, the power of compound interest is very powerful as you stated. 5000 dollars turned into so much more. If you really think about it within 100 years 4,000,000 dollars is a very good deal since eventhough, you wont be able to use it most likely but you descendants would which is incredible. Another thing you pointed out which was fascinating was that you earn SO MUCH more if you start investing at an earlier age and is a really good life tip to having while progressing in life.
ReplyDeleteIt’s incredible to think that something used heavily today on a personal scale was also used hundreds of years ago to fund a country. It really shows how the importance of compound interest has transcended time. In the context of retirement savings, it can be majorly helpful. If people have began their life without setting aside money for interest, or started too late, what would be the recommended plan of action? This post also mentions that the majority of people enter into retirement with significantly less money than they ‘should’ have. What happens to them when they run out of money? They could be disabled seniors incapable of getting a job and have already lessened their quality of life. What then?
ReplyDeleteWe've discussed this in class a multitude of times. It is the same with investing. Time can only help. However, no matter how much we think we have, we can never buy more time. Starting early, even when it seems impossible could save us hundreds of thousands of dollars versus if we waited until we were more secure. I think this is also why budgeting is so important and fundamental. It makes it so hard to allocate money to somewhere you can't even see (saving/investing) unless you are mindful of it from the beginning. If you have an extra dollar or two, almost no one thinks saving it would make a difference, but over time it can! Time is undoubtedly the most useful tool to grow our money, but it is also the scariest. If you miss the train there is no way you can ever catch up at a regular pace. It just goes to show, when we leave secondary education we should all be mindful of our time even as newly turned adults.
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