Devoted to understanding the basics and fundamentals of investing

I wrote recently about the future value of current consumption.  There were various comments about how some luxuries appreciate in value.  It wasn't my point to discourage the purchase of luxuries.  Rather, my point was to take care of necessities including retirement first and leave the other until there is discretionary income to buy them.  Also, I wanted to illustrate the impact of compound returns.

My friend Bob H suggested I write some more on the power of compound returns.  I thought it was a good idea, so here goes.

Suppose you started saving on your 21st birthday when you graduated from college and saved just $10 per week until you retired at age 65.  You would have 44 years of work and savings.  You would have a total of $22,880.00 in the bank if you did not invest it in anything.

If you put it in a bank account and were able to earn an average of 4% for those 44 years you would have $62,510.58 when you retire, a gain of almost $40,000 due to compounding.

If you invested in 10-year US government treasuries and earned an average of 6% the result would be $112,596.41.  You will have noticed that the higher the interest rate, the faster compounding works for you.  I will give two more examples.

If you invested in a typical balanced portfolio and achieved an 8% return, just twice what the bank paid you, you would earn $212,505.59 just from saving $10 per week and investing it wisely where it could earn a compounding return.  You have earned almost $190,000 due to compound earnings over the $22,880 you actually saved.

Finally, if you could stand the risk and volatility and invested in a broad stock market index like the S&P 500 and earned an average of 12% interest you would have $841,442.30 available to you when you retire.  You invest just $10 per week for a total investment of $22,880.00 and through the miracle of time coupled with compound returns you have almost $850,000 available to you when you retire. 

So go out there and compound some returns!  Every day out of the market is money forgone.