The Wealthy Barber is one of my favorite books to recommend to young people because of the clarity of its stories. Neil Groundwater initially told me about this great book.
Below is my favorite story from the book:
“Two twenty-two-year-old twins decide to start saving for retirement. One opens an IRA, invests two thousand dollars a year for six years, and then stops. His IRA compounds at twelve percent a year … very good. The second twin procrastinates and doesn’t open an IRA until the seventh year — the year his brother stopped. The second twin then contributes two thousand a year for thirty-seven years. He, too, earns a rate of twelve percent a year. At age sixty-five, they go out for dinner to compare their IRA holdings. The second twin, who is fully aware that his brother stopped contributing thirty-seven years earlier, is confident that his IRA will be worth at least ten times as much. What do you think, Cathy?”
“I think he’s wrong … or you woulnd’t be telling us the story,” was her clever rationale.
“Yeah, yeah,” Roy laughed. “At age sixty-five, they would both have approximately one million two hundred thousand dollars.”
The first brother paid $2,000 a year for six years. He contributed a total of $12,000. The second brother contributed $2,000 a year for thirty-seven years. He paid a total of $74,000 — more than six times his sibling!"
The main point of this is the magic of compound interest and the most important attribute young folks have in this formula is TIME. That is why I always tell young folks when I speak at Universities and Colleges that I was never very good at math, but by God I know compound interest backwards and forwards :-) I have always put a 25% of whatever I made into long term savings since age 16. As the old saying goes "and that has made all the difference...."
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