Quarter Per Day vs. 10K Now
Here’s the question:
Which would you choose? 25 cents per hour for life… or $10,000 today…?
A little thought goes into this…and you have to assume “some” rate of return…so let’s assume you can earn a 5% annual rate of return.
Rather than just guessing, I actually turned to a trusty excel sheet to figure out the exact numbers…what is striking…is the power of compounding and adding to your savings over time…even little by little…
So here are the numbers…25 cents per hour for life (I assumed 60 years) or $10,000 today…on both I assumed a 5% rate of return on the money…
So there is a breakeven point. You obviously start out on day one better with the $10k…but after 45,409 hours (5.18 years) you break even…from that point on the 25 cents per hour begins to outpace the $10k compounding at 5%…at the end of 60 years? The quarter per hour (525,600 hours, compounded at 5%) becomes $835,963.84…and the $10k at 5% becomes $200,854.80.
So as long as you live more than 5.18 years, the quarter per hour is a no-brainer.
Just imagine, 25 cents an hour is only $2,190 per year in savings… (365 X 24 X 25 cents). Yet the longevity of the savings (60 years) coupled with a modest rate of return becomes a tremendous amount of money (over $800k). But…without the 5% compounding $2,190 for 60 years is only $131,400…this just goes to show that a little savings for a LONG time can go a very long WAY…particularly when you can see the power of compound interest…
Albert Einstein talked about compounding as the most “powerful force in the universe.”
How can you do the same?
- Turn on the automatic savings switch in your company’s retirement plan…increase it each year by 1% or 2% until you are making the maximum contribution allowed — $17, 000 if you are under age 50; $22,500 if you are 50 or over.
- Add to a Roth IRA every year you can – $5k or $6k limit (under and over 50) as long as you are within the income requirements.
- Beyond saving in your company retirement plan (401k, 403b, 457 plan) start an automatic investment plan with a low cost index mutual fund or ETF…look at Vanguard’s Dividend Appreciation fund (VDAIX) or ETF (VIG) for a long list of US companies doing business all around the world, and that also pay dividends. $18.20 a month would be a great start…and remember, it’s just 25 cents per hour…
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