Friday, September 17, 2010

Can Compound Interest Make Me a Millionaire?

I am a good saver, make that a great saver, but I am not great at growing my money and I really want that to change. Indeed, the four pillars of my curriculum as a financial literacy storyteller are: earning money, spending money, sharing money...and growing money. How great it would be if I could say at the end of my show, "By the way, I'm a moderately successful storyteller and a millionaire."

To that end (growing my savings to the million-dollar mark) I have been learning about compound interest, the interest you can earn over time on your savings + the interest on your savings. But being an "arts major" as my friends like to remind me, I'm not a math whiz so it's hard for me to visualize how compound interest works. So I am going to work through the math and see if I can answer my own question: can compound interests make me a millionaire?

Laura, age 41, hypothetical amount to invest $100,000, goal one million dollars

Let's say, I hear about a monthly income fund (a mutual fund that that pays you a set amount every month and may also, hopefully, grow in value over time) that costs 5 dollars per unit and pays 6 cents per unit every month for a total of 72 cents per unit every year (12 x 6 cents = 72 cents) or 14.4% annual interest.

With $100,000, I can buy 20,000 units. Over 12 months I am paid monthly to a total of $14,400 per year (20,000 units x .72 cents = $14,400). At the end of 12 months my investment is now worth $14,400 + $100,000 = $114,400.

Now even if I don't buy more units with "fresh" money and I just let the $114,440 buy more units, this is how long it will take me to be a millionaire. I am assuming that the value of each unit stays at $5 and that the monthly payment stays at 6 cents (this of course can change at any time and you need to stay on top of it).

Initial Investment $100,000 / 20,000 units
All earnings are reinvested to buy more units
No additional outside cash is added to the original $100,000
In year 1, I earn $14,400 and buy 2880 units for a total of $114,400
In year 2, I earn $16,473 and buy 3296 units for a total of $130,873
In year 3, I earn $18,846 and buy 3769 units for a total of $149,719
In year 4, I earn $21,560 and buy 4312 units for a total of $171,279
In year 5, I earn $24,665 and buy 4933 units for a total of $195,944
In year 6, I earn $28,216 and buy 5643 units for a total of $224,160s
In year 7, I earn $32,279 and buy 6455 units for a total of $256,439
In year 8, I earn $36,927 and buy 7385 units for a total of $293,366
In year 9, I earn $42,244 and buy 8448 units for a total of $335,610
In year 10, I earn $48,327 and buy 9665 units for a total of $383,937
In year 11, I earn $55,285 and buy 11,057 units for a total of $439,222
In year 12, I earn $63,246 and buy 12,649 units for a total of $502,468
In year 13, I earn $72,354 and buy 14,470 units for a total of $574,822
In year 14, I earn $82,772 and buy 16,554 units for a total of $657,654
In year 15, I earn $94,691 and buy 18,938 units for a total of $752,345
In year 16, I earn $108,327 and buy 21,665 units for a total of $860,672
In year 17, I earn $123,926 and buy 24,785 units for a total of $984,598

By this time my investment is paying me about $12,000 per month so in February of year 18, I will reach my goal of being a millionaire. And, I'll only be 59 plus my money will be making about $140,000 a year for me. Awesome and totally worth saving for. I wonder if I'll still be telling stories then.

That was a lot of math, but a good lesson, especially for an arts major. If you want to play with some numbers without the carpel tunnel, plus take into account the rate of inflation, check out the Bank of Canada website. They have easy-to-understand interest rate calculators. Have fun and don't forget to share the fun with your kids. If anyone has the time to compound their way to a million bucks, it's them!

Copyright 2010. Laura Thomas. All Rights Reserved.

1 comment:

  1. compounding is indeed the eight wonder of the world