The Power of Compound Interest

A dollar is worth more today than it is tomorrow, and with the help of compound interest, that couldn’t be truer. This concept is often referred to as the “time value of money” and it shows us that those who are too hesitant to invest their money are in fact, choosing a negative investment.

It seems like discussing retirement is usually reserved for those who are older and approaching the end of their careers. For one reason or another, young people are seldom encouraged to open and contribute to investment accounts while the potential for growth couldn’t be greater.

What is Compound Interest?

To better understand compound interest, we can contrast it with simple interest. With simple interest, you can gain a return on your initial investment over any number of periods. If you invest $1,000 and the return rate is at 5% annually, your account will earn $50 year after year. The growth will be linear. At the end of the first year, your account balance would be $1,050 and increase to $1,100 and the end of the second year, then $1,150, and so on.

On the other hand, compound interest allows the growth to be exponential. The 5% annual return rate is a percentage of the new account balance year after year. The return would increase every year instead of just being the same $50. Because your account balance is higher each year, so is your return.   At the end of the first year, your account balance would be $1,050 and increase to $1,102.50 at the end of the second, then $1,157.63, $1,215.51, and so on.

The Power of Starting Early

Compound interest can be highly profitable, especially over the long run. To illustrate this, we’ll compare a set of twins, Simon and Duncan, who took slightly different approaches to investing and compare the results when they reach retirement.

Simon decided to begin investing as early and as much as possible. At age 27 he had zero dollars in his IRA but decided to dedicate $6,000 per year until retiring at age 60. Over the 33 years, his highly diversified portfolio had an average annual return of 11%. When he retired at age 60, his IRA’s balance sat at $1.65 million.

Duncan brushed off retirement savings when he was younger. He’s got so much time left, so why worry about it right now? So he opened up his retirement account 10 years later than his brother Simon. At age 37, Duncan began investing $7,000 per year ($1000 more than his twin) and received the same 11% annual return and retired at age 60 just like Simon. But his IRA’s balance only grew to $638,000.

Those 10 years made a difference of over $1 million! From age 27 to 37, Simon only contributed $60,000 but those early contributions made it so that he was over a million dollars richer at age 60. Duncan did very well but could have earned so much more had he simply started a few years earlier.

This chart shows us that the total amount each of them invested was very close. But Simon’s early start gave his money more time to grow, making his balance down the line so much greater. And the huge financial advantage does not end there. During their retirement years, Duncan’s account would continue to grow at about $70,000 per year, while Simon’s account would be earning about $182,000 per year (assuming 11% avg. annual return rate). After 10 years in retirement, Simon will have earned over $1.1 million more than his brother.

The purpose of this example is not to urge anyone to compare their numbers with anyone else’s. We all have unique financial positions. Rather, it is to help us understand the extreme potential in long term compound interest and the colossal effects of putting off investing. “We’re in a recession so it wouldn’t be good to invest when everything is crashing…There’s an election coming up that will crash the market…Stocks have been so green lately, I don’t want to buy in when everything’s high…” We can always come up with reasons to not invest in our futures. But what a mistake it would be to act as the slothful servant who buried his talent out of fear, instead of investing it like his brothers (Matthew 25).

By Brenton Walker

References

“Compounding and the Cost of Waiting.” Compounding and the Cost of Waiting – Wells Fargo, Wells Fargo, https://www.wellsfargo.com/financial-education/retirement/compounding/.

Which Investment Account is Right For Me?

It can be daunting to plan out retirement when there is a seemingly endless number of rules, components, and factors to consider. Because of the complexity of it all, so many put off investing until much later in life, when the greatest potential for long term growth has already passed. As it is important to choose the right option depending on one’s unique financial position, here are the foundational elements of ten different investment accounts that will be discussed in more detail below.

(Numbers for 2022)

Individual Retirement Accounts (IRAs): Traditional vs. Roth

IRA accounts are the perfect place to periodically deposit money so it can continually invest and grow over many years to make retirement much easier. Most everyone qualifies to open an account and there are few barriers to entry. Here are the main differences between Traditional and Roth IRA accounts to know about:

Joint/Individual Investment Accounts

Custodial Accounts

SIMPLE IRAs

401(k)/403(b)

Roth 401(k)

Solo (Roth) 401(k)

These plans have all the same tax and contribution rules as traditional 401ks. But Solo 401ks are made for self-employed business owners who don’t have any other full-time employees. You also have the option to have a Solo Roth 401k plan, which would employ the Roth tax rules.

ESA

529

“This is a good choice for you if…”

Roth IRA: If you want to consistently contribute money over the long term to an account with major tax benefits that’s separate from any employment or other retirement program.

Traditional IRA: If you want to roll over a previous 401k plan or if you want to have a tax deduction with your contributions now instead of a tax break in retirement.

Simple IRA: If you are the owner or employee of small businesses.

401(k)/403(b): If you are offered this option through your employer.

Solo (Roth) 401(k): If you own a business, have no other employees, and want to contribute much more per year to retirement.

Joint/Individual: If you already max out your plan through work and max out a Roth IRA but want to invest even more.

Custodial: If you want to invest for expenses to benefit your children, or if you want your child to have some money for any use when they reach of age.

ESA: If you want to invest for your child’s education expenses.

529: If you want to invest more than $2,000/year for your child’s education expenses.

By Brenton Walker

References

Kagan, Julia. “Simple IRA .” Investopedia, Investopedia, 26 Nov. 2021, https://www.investopedia.com/terms/s/simple-ira.asp.

O’Shea, Arielle. “529 Plan Rules and Contribution Limits.” NerdWallet, 19 Sept. 2022, https://www.nerdwallet.com/article/investing/529-plan-rules.

Williams, Rob. “Saving for College: Coverdell Education Savings Accounts.” Schwab.com, Charles Schwab, 24 Feb. 2021, https://www.schwab.com/learn/story/saving-college-coverdell-education-savings-accounts

The Crypto Conundrum Investing Class

Wednesday October 26, 2022 6:30 PM
 

Come join our free investing class about the ever growing digital currency craze.

Should I dedicate a portion of my money to crypto-based investments? When there are always trending stories of those who get rich quick through crypto investments, it’s easy to join the hype and jump aboard. But are digital currencies as reliable and profitable as they’re made out to be? There is a lot of interest and excitement about cryptocurrency and other digital “investments,” but it would be wise to look beyond the headlines and recognize the instability of this territory.

Location- Dixie’s Diner, 2150 Channing Way, Idaho Falls, ID 83404

RSVP deadline is past

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Gearing Up for the Next Crash Webinar

Wednesday May 4, 2022 4:00 PM to 5:00 PM
 

I am doing an investing class live webinar for clients and guests.

Cost- Free

Date- Wednesday, May 4th, 2022

Time- 4:00 PM

Where- Online through Zoom

Topic- Gearing Up for the Next Crash

Are you wondering if there could be a stock market crash in the near future? You are not alone. In this class we will go over all of the stock market crashes throughout history and what we can apply going forward.

Where should you put your money if you think a crash is coming? The answer might surprise you.

This is purely educational.

RSVP deadline is past

Gearing Up for the Next Crash-Investing Class

Wednesday April 6, 2022 6:30 PM
 

Come to our free investing class here in Idaho Falls.

Are you wondering if there could be a stock market crash in the near future? You are not alone. In this class we will go over all of the stock market crashes throughout history and what we can apply going forward.

Where should you put your money if you think a crash is coming? The answer might surprise you. Come and find out.

This is purely educational. There will be no sales pitch at the end.

Cost- Free (Dinner is on me)

Date- Wednesday, April 6th, 2022

Time- 6:30 PM

Location- Dixie’s Diner, 2150 Channing Way, Idaho Falls, ID 83404

RSVP deadline is past

Separating Myths From Truths: The Story of Investing

Wednesday February 2, 2022 6:30 PM to 8:00 PM
 

Come and join us for this free investing class in Idaho Falls. Seating is limited, so RSVP now if you want a seat. Dinner will be provided.

We will discuss the topics of mutual funds, stocks, market timing, and diversification.

The mythology of traditional investing leaves most investors confused and frustrated with their results. In this session you will discover the truth about investing and academic theories as an alternative to the accepted mythological model.

Location- Dixie’s Diner, 2150 Channing Way, Idaho Falls, ID 83404

Time- 6:30 PM to 8:00 PM

Cost- Free

RSVP deadline is past

Cryptocurrency: Are you missing out?

bitcoin; cryptocurrency

Do you suffer from FOMO?  FOMO stands for Fear Of Missing Out.  Just about everyone suffers from this in one way or another.  Bitcoin and Dogecoin, among other cryptocurrencies have become household words and their popularity is exploding. So what is cryptocurrency, and is it something you should invest in?

What is cryptocurrency?

Cryptocurrency is a form of currency that only exists in numbers on a computer screen, rather than an actual coin or physical dollar bill. It is a form of international currency and it is the first decentralized digital currency in the world.   You can buy cryptocurrency from any online seller, by trading your dollars for whatever cryptocurrency you choose.  Bitcoin was the first cryptocurrency, but there are many other types of cryptocurrency now trying to surpass bitcoin in popularity.  As of right now, most people view cryptocurrency as an investment more than as an actual currency.

Why is Crypto so popular right now?

The price of 1 Bitcoin started out close to $1 back in 2011, and now the price of 1 bitcoin is about $38,000. Even just a few weeks ago it was around $60,000!  That is some pretty extreme price fluctuation.  So yes, some people have made a fortune if they got in before it was cool.   Other types of Cryptocurrency like Dogecoin, and Etherium have also seen some decent growth recently in terms of price.   But the swings are pretty wild, with huge percentage drops following huge run ups.

Should you invest in (buy) Cryptocurrency?

Investing in cryptocurrency is much more similar to gambling, than it is to investing in diversified stock based mutual funds.   Yes, if you mortgage your house to buy Bitcoin now, you could be filthy rich in a year, but you could also be completely broke too.   There is so many regulatory issues that crypto has not made it through yet, and there have been several instances of price manipulation and fraud.   If a “bad guy” wanted to commit a financial crime and fly under the radar, cryptocurrency seems to be the easiest way to go.

My main suggestion when it comes to cryptocurrency is to only use money that you absolutely do not need and could live without to invest in it.  If you like thrill rides and want to try it out, go right ahead, but not with grocery or retirement money.

I have personally been watching the prices of the popular cryptocurrencies over the last few months, and the price swings have been pretty extreme on a daily basis.  The price volatility seems to be about 10 times more extreme than the price volatility of the stock market.

For me there is still far too much uncertainty when it comes to investing in cryptocurrency.  I don’t personally own any, and I advise clients, friends, and family to stay away when they ask me about it.

Buying Bitcoin without actually Buying Bitcoin

The prudent way to invest in cryptocurrency, is by investing in a globally diversified stock portfolio.  In this way, you are in turn investing in lots of companies that buy, sell, and accept cryptocurrency.  In this way you take a lot of the risk out of it, and get more steady returns.  Your Fear Of Missing Out thirst might not be quenched, but you will be able to sleep better at night and still get a pretty good long term return.

By Jimmy Hancock

References

  1. Ramsey Solutions. “What Is Cryptocurrency and Should I Invest in It?” Ramsey Solutions, Ramsey Solutions, 13 May 2021, www.ramseysolutions.com/retirement/investing-in-cryptocurrency.
  2. “Yahoo Finance – Stock Market Live, Quotes, Business & Finance News.” Yahoo! Finance, Yahoo!, finance.yahoo.com/.

 

Topic: TBD

Wednesday June 23, 2021 6:30 PM to 8:00 PM
 

Location: Dixie’s Diner, 2150 Channing Way, Idaho Falls 83404.

RSVP deadline is past