The power of compound interest : LUSENET : A Village Commons : One Thread

I was asked to post something of a financial nature so here is one of my favorite stories with a financial bent. Bill and Bob were twins who went to an area lake to celebrate their HS graduation and heading off to college together that fall. Sadly, Bob was in an skiing accident causing severe head trauma and, while he recovered to a highly functional level, college was no longer an option. Undaunted, he took a job and even sent Bill some spending money while he was away.

Bill was so touched by this he dedicated himself to helping others in similar situations and complete college, medical school and an internship specializing in neurology. Ten years after HS Bill begins practicing and making a good living. He takes in his brother so Bob never has to work again. While Bob had been working he annually contributed $2,000 into an Individual Retirement Account for himself which earned 10%. Of course, when he stopped working, he stopped putting money into that account.

Bill, on the other hand, began contributing $2,000 annually into an account for himself (also paying 10%) that very year as he was finally earning an income. Thirty-seven years later the brothers celebrate their shared 65th birthday. The question is, "Which brother had more money in his retirement account?"

Bob had contributed a total of $20,000 over the decade he worked while Bill contributed $74,000 over nearly forty years. The correct answer is that Bob, who put in over $50,000 less had more money at age sixty-five! That is the power of compound interest. Investing over the long haul is the key here.

Please let me know if you have any interest in anything else like this. I'm not a financial planner or anything like that (which means I don't have anything to sell you) but will be happy to share some thoughts on finance if there's interest. Let me know one way or the other.

-- Gary in Indiana (, September 06, 2001


Gary, I would LOVE to hear any thoughts you have on finances. It's not something I'm too good at, mostly because I never have the time to study up on it. It's always nice to hear people who know what they are doing pass along information. :)

-- Jennifer L. (Northern NYS) (, September 06, 2001.

Count me in too, Gary.

I'm glad someone here can explain how saving a little over a long period of time pays off. That is my strategy to save for my old age (or older age, LOL). I cannot afford to sock away large amounts of cash at a time; my wife and I have started our family and cash can be tight at times.

My IRA's are doing okay for now, but I would like to know about other strategies. I've never trusted the stock market; the past 10 years have been very good, but is too volatile to my mind. I want a safe investment, something that will be there when I need it. Not necessarily maximum growth, something safe. Any ideas?

-- j.r. guerra (, September 07, 2001.

Me. too. I'll try to contribute when I can. Not exactly related, but I've often thought people could learn so much from each other if they could openly share their approaches to finances. I mean, even if people didn't want to reveal their numbers, approaches could still be addressed.

In my family, my parents both believed in the value of saving and starting it early, but they tool entirely different approaches. My mother was very risk oriented and my dad focused on very conservative investing (CDs, treasury bonds). (They eventually divorced). My mother was influenced by her father, a man who never went past 8th grade yet intuitively succeeded in the stock market. Obviously, we had extreme sides of the spectrum represented in our household.

-- Cathy in MN (, September 07, 2001.


Would be glad to hear what you have to say about the subject of finance. May even contribute a little somewhere down the line.

It seems that many people put off saving until tomorrow. Your story shows why if at all possible you should start saving today, even if it is only a little bit each month. Time is money really applies in this case. Hope to hear from you again soon.

-- Bob in WI (, September 07, 2001.

Gary, what is your opinion on dividend reinvestment plans? Good, bad, or not worth the time?

-- JoAnn in SD (, September 09, 2001.

WOW! Quite a few responses here. I've been offline for quite a little while here with different problems on each of two PC's here. Obviously, one is now up and running so let me try to respond to some of them.

First, I want to not only reiterate but also emphasize that I am by no means nor stretch of any imagination a financial expert of any shape, kind, sort or description. I'll only try to tell you what I might do in a similar situation but in no way want it taken as gospel.

I think the story above best illustrates the advantage of saving early. I chatted with a friend just the other day on this subject and told the same story. She and her husband run a business here that they bought from his Dad recently. While she's there all the time, she doesn't draw a paycheck ("[Husband] draws a check, but I don't).

My first response was, "Well, that's good for him, but what good does it do you?" I explained to her that by simply drawing the equivalent of $1 an hour as a salary and putting that money into an IRA annually, she could fully fund her $2,000 annual contribution. I realize different people view different levels of money differently, but in her case we were talking $40 a week from a really going concern. Quite frankly, the cigarette machine there makes more than that.

As to dividend reinvestment plans (known affectionately as DRIPS), I'm personally not a fan. There was a time when they were a good vehicle for someone to buy stock because of the tremendous savings in brokerage commissions. Now, however, you can buy even a single share of stock with a commission as low as $8.00-10.00. While I wouldn't recommend buying just one share of anything because of the relatively high percentage cost associated with even that low of a brokerage fee. The possible exception to that might be Warren Buffett's Berkshire Hathaway (the 'A' issue is currently $68,000 per share, while the 'B' issue is a mere $2,273 today).

The main advantage beside saving brokerage fees on DRIPS was being able to invest a little money at a time. Today you can open an IRA brokerage account at any number of places online with a very minimal amount. You can contribute money into that account as you are able and then, when you feel you have enough to invest in something, do so. I believe a gentleman by the name of Charles (Chuck)Carlson (sp?) has written extensively on DRIPS as an investment vehicle. I looked into them early on but decided with the online commissions so low now, I'd go another way. Again, this is not to say you should do what I've done. ;o)

Well, I've rambled on long enough here. Thanks to everyone who responded. Now that I'm back online again (with fingers crossed for luck), I'll try to respond a bit more quickly. I hope this helps.

-- Gary in Indiana (, September 12, 2001.

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