Where was Dad when I was 0 years old?

March 22nd, 2010

Compound interest is still a great invention
Let’s say you start investing today at the rate of $100 a month for your newborn who arrived at some ungodly hour this morning, and who, when he grows up, takes over and continues that same investment until he reaches the age of 50, it will be worth how much?

Average return
Well, if in these miserable and chaotic financial times, you can achieve an average return of just 6% per year, the money you invest each month will accumulate into a cool $360,000 in 50 years. If you can manage to squeeze a 10% annual return, as you could have in the years before today, that $100 a month will turn into a staggering $1.4 million. This morning’s baby, now a grey-haired, middle aged man will bless his wise old father. May you still be there and be at the celebration! Not bad for $100 a month! A sum like that would make your retirement – and mine- a lot brighter!

What’s happening to returns?
Interest on invested money seems to drop all the time. Is this how things are going to be for the next generation? Is interest on money saved in the bank a thing of the past, something that future generations will only read about in those email fact sheets that keep buzzing around?

Stock market returns
What about stock market returns? They may be lower than they have been in the past but they may be the best one can do in the next 50 years. The reason, it is explained, is that “all wealth is created by business, and all other assets that people might use for investments have to be paid for from the proceeds of business, all returns from bank accounts come from the proceeds of businesses that borrow money, etc.”

The norm
If the norm used to be 12 percent, then 6 percent is probably realistic for our savings exercise above and hopefully one will be able to achieve that. But it’s clear that everything has changed and our children will not be living in the same world as their parents.

You can never tell
When I was a young engineer in the 60’s, two architects opened a practice in an adjoining office. On the first day they pledged to invest 10 percent of all fees they earned in one ounce gold coins, which were then selling at about $30 each. I moved away and forgot all about them. Years later their names came up in a conversation and I remembered the gold coin promise. I inquired and learned that they were now retired and living in villas they had bought in Spain back in the seventies. The price of gold soared in the 70’s reaching almost $700 an ounce! If these clever architects had kept on buying gold coins, they are now wealthy men.

Payday Loans
I, on the other hand, discovered Payday Loans and I manage to stay retired that way.

This entry was posted on Monday, March 22nd, 2010 at 5:49 am and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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