The other day I was explaining to my 10 year old son about saving his money and the art of compounding. I told him that if he could make $100 per week he should save half of that money and invest it. He was not excited about this, of course, but his eyes lit up when I showed him how this $50 per week sacrifice could make him a Multi-Millionaire by the time he was 40 and a Multi-Billionaire by 70.
Our conversation went a little like this:
Dad: Son, you like playing Call of Duty and your computer right?
Son: Yeah
Dad: Well, Activision (ATVI) which makes those epic games; and Intel (INTC) which makes the processor for your computer are public companies, which means anyone can purchase shares and own a little piece of those companies, They even pay dividends which is part of the profit they make when you and your buddies buy games and new computers.
Son: Really?
Dad: Yeah, so if you help uncle Nick at the restaurant and me on the farm, you could make around $100 bucks per week. Then you can set aside half of that and buy shares of those companies.
Son: Or I could buy the new Call of Duty game and a new mouse for my computer...
Dad: How much do you think that $50 per week will be worth by the time your 40?
Son: I don't know, a hundred thousand dollars...
Dad: Well, there are 52 weeks in a year and your 30 years from being 40. Fifty dollars each week for 40 years for 1,560 payments.
Son: That's not even a hundred thousand dollars when you take 1,560 multiplied by $50. That's not much for saving for 30, years dad. I still think I should buy the new game.
Dad: Well we haven't figured the interest and how it compounds over time. Let's say those companies will grow your money by 10% per year on average which would include the dividends. You can leverage that by two with most brokerage accounts which will bring your annual return to 20%. Let me get the financial calculator and plug it in.
- Interest = 20% per year or .3846% per week. We are working in weekly payments so we will use the weekly interest rate
- Periods = 1,560 since there are 52 x 30 periods
- Payment = $50 each period which is weekly
- Present Value = 0 since we are starting with the first payment next week
What do you think the future value is with the interest???
Son: I don't know, two hundred thousand?
Dad: $5,171,560.73 Yeah, that's well over 5 million dollars.
Son: NO WAY!!! That's not possible!
Dad: Yes it is son. That's the art of compounding.
Son: That's Crazy! I'd be RICH!!!
Dad: Yeah! Do you want to save $50 bucks a week now?
Son: What if I saved $75???
Dad: That would be almost 8 million at $7,757,341.09; and if you held it until you turn 50 it would be worth $57,223,988.93 over 57 million!
Son: WHAT???
Dad: If you invested $75 per week, at 70 years old your investment would be worth over 3 billion dollars.
Son: What! How is that possible? That's so much money! I'll start saving now!
Dad: Good plan son!
The art of compounding is a beautiful thing, especially when a great deal of time is given to let it build. Teaching our children about saving and financial discipline is one of the most important lessons we can pass down to them. Imagine how much savings could be earned if the weekly payment was increased as the earning potential grows... Check out Cash Cow Farmer and see how you can increase your profits and start building your billion dollar nest egg...
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