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April 20, 2006


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A blog after my own heart. This topic was my very first blog entry.

A couple of important things to note:
(1) Albert Einstein discovered the rule of 72
(2) Albert Einstein said this discovery was his single best discovery.

Rule of 72: Divide 72 by your investment rate of return or the interest rate on your debt and you'll get the number of years it'll take for either to double.

Here's some more fun math:

Say a kid got a 'great' paying job for a 20 year old at 45k anually...but he actually lived on the same 15k a year that the kid going to med school survived on...and let's say the 20 year old that skipped med school for the 'great' paying job invested the remaining 30k of his salary into stocks.

Here are the facts...

The med-school student graduates 'on time' at the age of 28; secures a job paying 150k a year and pays all of his debts off by the age of 33---so theoretically he's 33 before he actually has an effective salary of 150k.

The kid that skipped med-school and invested in stocks earned the historical average of 10.1% annually on his money (10.1% since 1926...but if you skip the Great Depression years the average is actually closer to 13%)
So where is this same kid at the age of 33?

He has $920,180 dollars in compounding assets. Coupled with his 45k annual salary he will earn 135k at age 33 while the doctor earned 125k.

The doctor cannot mathematically catch up up to the scrub who's still at his 45k a year gig...because after 13 years the scrub has about 122k to reinvest in the market that year while the doctor couldn't match that unless he lived on 3k for the year.

(What's the lesson? Understanding financing makes you wealth...and salaries are overrated.)

But none of this really happens, does it? The kid doesn't invest and the doctor stays in debt...

It's amazing they don't teach real-life economics in school:)

p.s. pardon the error in the first paragraph where I gave the doctor a starting salary of 150k instead of 125k.

Please don't perpetuate the Einstein quote theory. There's no proof:

But by all means do keep spreading the word about the value of compound interest and the Rule of 72 -- just because Einstein didn't say it doesn't remove the value.

But, wouldn't it be great to know who really did say it?

Many people use the 10% for their long term interest examples, but how many of us actually yield 10% on our investments over the space of 10, 20, even 30 years? I personally know several men who have averaged 10% in investment real estate over the course of their career, but I've yet to hear I'd like to hear many people comment on their personal retirement portfolios.

Do 10% retirement yield exist anywhere besides such examples? Please show me, I want to believe!

This is a very good post, including the comments.

It's hard to overemphasize the iportance of having a good understanding of the time value of money (TVM). Everyone should understand the TVM but it's especially important for investors to grasp this concept.

Understanding the TVM is so important that I firmly believe that no one should be awarded a high school diploma without first demonstrating that they have a basic understanding of the TVM. Unfortunately, this is something that has always been lacking from most high school curricula. I say it's time for that to change.

From my calculations investing $30000 per year for 13 years at 10.1% ends up with $740,582 worth of assets and not $920,180. Correct me if Im wrong !

Marco --

I get that too. I think maybe he used 13% above?

$30000 per year for 13 years at 13% ends up at $899,541. Using my Hp 12c calculator ! To arrive at $920,180, interest would need to be 13.34%.

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