Saving with Compound Interest
Compound interest is one of the most often spoken of terms in the finance vocabulary. It can also become complicated when really it’s quite a simple concept. One of the best ways I’ve ever heard it described is by comparing it to a child’s story as written by Noel Whittaker in his book More Money. Rather than re write Noel’s explanation I thought I would shorten it as an extract and have included it below.
The Fairy Godmother and the Magic Train
(a re-interpreted extract from Noel Whittaker’s book – More Money)
The Fairy Godmother once told a family about a Magic Train that visited a family once a year at their own magic station. The cost of the ticket was $1000 a year or $2.73 per day. All the family had to do was put aside $2.73 per day and every year the good fairy would visit and tell the family the Magic Train had just arrived at another station.
Every time the train visited a station it would load a carriage full of money, including some extra (interest).
Last station – hooray!!
This went on for 37 stations (37 years) until the Fairy Godmother said the money in the carriages was now worth over ONE MILLION DOLLARS and you now no longer have to pay for a ticket on the Magic Train. The ride is now free for the rest of your life.
The engine of this Magic train has a name painted on the side – The Magic of Compound Interest.
See 40 station timetable below.
As you can see from the table, once you pass the 37th station, the train and savings increase at a fantastic rate. By 40 years the savings have increased to $1,524,299!!
I’ll include the Savings Calculator at the bottom of this post so you can play around with some other amounts and time frames.
To arrive at roughly the same result as the table, use the calculator and add $83.33 per month savings, 37 years duration and 14% interest rate.
Bingo! It’s quite simple but amazing the result of saving only $2.73 per day for 37 years. Great for saving for children!
This article was originally written by Noel Whittaker in 1990 which is a long time ago. His assumptions were a 14% return and 7% inflation. Of course now, after the GFC, returns and inflation have been significantly lower. The purpose of this article though is the overriding principle of saving. It still remains the same today and the article was written as a motivator for everyone to start saving money now!
I hope you enjoyed it and will see you next time.
Your details will always be kept safe and never shared.
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