One of the few “regrets” I have in life is not having the foresight when I was younger to fully appreciate the concept of compounding returns. Oh sure, I excelled in math and could solve compound interest equations, seeing the results of what one dollar could turn into over a period of time with various interest rates.
I even had a savings account that paid substantial interest when I was a teenager, so I saw this theory in action every month when I received my bank statement in the mail.
Someone over at the Rockstar Finance forums recently posed a question asking what minimum wage was when you got my first job. I started working in October of my freshman year in high school and earned, if I recall, $3.35/hour. This got me thinking back to that time and I was inspired to pull up my earnings history on Social Security web site.
I earned $185 for the remainder of that year!
Some of this money was saved at the time; it eventually went to a car, some of it went to two overseas school trips (priceless!), etc. But what if I had socked away a mere 10% of my earnings during high school?
How much would I have now?
I found this handy S&P return calculator and got to work figuring out my hypothetical present day balance. For simplicity sake, I’m working under the assumption that I deposited the money into an IRA at the end of each calendar year and invested in a simple S&P index fund.
That $18.50 from my first two plus months on the job would now be worth a whopping $265, having seen a total return over 1,333%!
While not life-changing money, when you start to look at all of my earnings throughout my high school years, things start to look at little more interesting:
|Year||Earnings||10% Savings||Total Return Since||Dec. 2017 Value|
I earned $11,233 working in high school, where I could have easily saved 10%, or $1,123 without missing it. Assuming deposits at the end of the year, and the final deposit coming in August after graduation when I went off to college, that $1,123 would have been worth nearly $13k at the end of last year.
That’s nothing to sneeze at!
It gets fun to play with the numbers, changing the savings rate to 25% and seeing the balance grow to over $32k.
Since that time, we’ve seen mini-crashes, the dot-com bubble burst, terrorist attacks, wars and foreign invasions, the Great Recession, sell-offs, international debt crisis, etc. etc. etc. Yet the market continues to rise upward and onward.
This is a great reminder to stay the course, no matter the external pressures on the markets, and let time perform its magic.
I hope one day soon to use this as a real life example for my own children, in hopes of inspiring their young selves to give a gift to their future selves.