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Disovering the art of compount interest
Old 01-29-2007, 05:11 PM   #1
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Disovering the art of compount interest

Today I was in my corporate finance class at a large public university. The professor was talking about the time value of money and started talking about Roth IRAs. He did the calculation of saving 4k annually for 30 years with an annual return of 10%. The number came out to be something like 690,000. There were many "wows" and shocked faces in the crowd. I guess this was some people's first introduction to compound interest.

I'm glad that my parents taught me about money and I discovered this board because I sat back knowing that I made my 2006 contribution and plan on making a 2007 contribution as well. Hopefully others discovered the magic of compound interest today.
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Re: Disovering the art of compount interest
Old 01-29-2007, 10:13 PM   #2
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Re: Disovering the art of compount interest

When I was a baby I had a bank account. I discovered compound interest somewhat earlier than your classmates. And I remember learning about it in school, too. Maybe when I was about 12.
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Re: Disovering the art of compount interest
Old 01-29-2007, 10:23 PM   #3
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Re: Disovering the art of compount interest

I remember pondering this topic very early....probably when I was about 16 years old. Since we didn't have computers to calculate all that, I remember I had a book that had multipliers to use for various rates of return and timeframes. Anyway, that was the beginning of my ER plans. Be glad that you already understand the power of long-term compounding. You might also want to thank the instructor for sharing the concept with others.
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Re: Disovering the art of compount interest
Old 01-29-2007, 10:53 PM   #4
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Re: Disovering the art of compount interest

Quote:
Originally Posted by lowflyer
I remember pondering this topic very early....probably when I was about 16 years old. Since we didn't have computers to calculate all that, I remember I had a book that had multipliers to use for various rates of return and timeframes. Anyway, that was the beginning of my ER plans. Be glad that you already understand the power of long-term compounding. You might also want to thank the instructor for sharing the concept with others.
I remember my dear old grandfather (who had an 8th grade education, bless his heart) who always used to preach about the savings bonds he purchased for his grandchildren, and how they earn "interest on top of interest". Later on, when I learned the official title of this action ("Compound Interest"), I marveled at how he was able to figure it out on his own.

Although, when he used to tell me about it, I thought it was always so obvious. Well, duh - if you leave the interest in the bond and let it grow, OF COURSE it will earn more money and grow faster than if you take it out. Unfortunately, not many people seem to grasp this concept (or the contrapositive, in the case of interest on credit cards/other consumer debt).
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Re: Disovering the art of compount interest
Old 01-29-2007, 11:21 PM   #5
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Re: Disovering the art of compount interest

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Originally Posted by rjpatt
Today I was in my corporate finance class at a large public university. The professor was talking about the time value of money and started talking about Roth IRAs. He did the calculation of saving 4k annually for 30 years with an annual return of 10%. The number came out to be something like 690,000. There were many "wows" and shocked faces in the crowd. I guess this was some people's first introduction to compound interest.

I guess what's amazing to me is that I would have thought compound interest would have been "discovered" waay before corporate finance.........or maybe this was corporate finance for non-finance majors............could also explains some the problems we're having nowadays with our megacorps.
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Re: Disovering the art of compount interest
Old 01-30-2007, 07:32 AM   #6
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Re: Disovering the art of compount interest

Where do most of the graduates of this university program end up? As insurance and annuity salesreps?
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Re: Disovering the art of compount interest
Old 01-30-2007, 12:20 PM   #7
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Re: Disovering the art of compount interest

What was that science fiction story -- something like "The James Jones Dollar."

In it, someone deposits one dollar and leaves it to the 40th generation James Jones. To make a long story short, that dollar ends up being worth more than the combined net worth of the entire galaxy. The 39th generation James Jones is childless, so the government gets to own everything in the entire galaxy, and everyone lives happily ever after.

Read that when I was a kid.
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Re: Disovering the art of compount interest
Old 01-30-2007, 08:23 PM   #8
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Re: Disovering the art of compount interest

Quote:
Originally Posted by rjpatt
There were many "wows" and shocked faces in the crowd.
Class number two . . . the power of compounding inflation. (Also an appropriate lesson to master before reading "The James Jones Dollar")
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Re: Disovering the art of compount interest
Old 01-30-2007, 09:21 PM   #9
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Re: Disovering the art of compount interest

I find it simply amazing that students at a major public university are awestruck by compound interest.

But then again many of them cant balance a checkbook or explain their cell phone plan, so perhaps my expectations are unrealistic.
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Re: Disovering the art of compount interest
Old 01-30-2007, 09:45 PM   #10
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Re: Disovering the art of compount interest

I am sure that most students understand the concept of compound interest, but the they don't know how amazing it can be when spread over 30 years.
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Re: Disovering the art of compount interest
Old 01-30-2007, 10:07 PM   #11
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Re: Disovering the art of compount interest

Quote:
Originally Posted by rjpatt
I am sure that most students understand the concept of compound interest, but the they don't know how amazing it can be when spread over 30 years.
Most probably understand it but for now that keg over in the frat house needs tapped.

My FIL's father always told him to buy a cow, something that kept growing while you were sleeping. Thank goodness he switched to mutual funds.
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Re: Disovering the art of compount interest
Old 01-30-2007, 10:34 PM   #12
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Re: Disovering the art of compount interest

Life is good....compound interest and paid vacation - laying on the beach and getting paid for it and just leaving your money alone and getting paid for it!
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Re: Disovering the art of compount interest
Old 01-31-2007, 08:59 AM   #13
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Re: Disovering the art of compount interest

I think I started grasping the idea, somewhat, of interest and compounding when I was around 10. At that time I think savings accounts were paying around 10%. I remember thinking that it was so cool that all you had to do was let your money sit in the bank, and if you had $1000 it would be worth $1100 at the end of the year. But then, I don't know if I understood inflation back then. :

I also remember one of my great-uncles asking me if I'd rather have $1000 or a penny a day doubled for 30 days. At first I said $1000, but then my uncle told me to work it out on the calculator. Blew my little pre-teen mind to think that it you took 1 cent and doubled that for 30 days, you end up with about $5.3 MILLION dollars!
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