What is the end result of a rate of return of 7% versus 12% over a 50 year period compounded monthly?
|Year||Initial Investment||7% Return||12% Return|
Wow, it is hard to downplay the difference 5% makes. What may not seem like a lot up front can add up to a lot on the backend.
Here’s a funny story, we had $600,000 in our bank account last month and we had to move the account to a new bank. The banker told us we were going to collect a little bit of interest on the account. We knew it wouldn’t be much, but something is better than nothing, right? In this situation, we had to move the money back and forth from the operating account so it did take a little bit of work. The banker sent us a rate sheet and told us approximately how much we would earn each month. The standard interest rate was 0.02% but with our bigger balance we qualified for the gigantic rate of 0.06%.
Our new banker told us it would be $60 of interest per year per $100,000. I thought he just didn’t know how to do math and I was sad for him since he is a banker. So I emailed him back explaining he had made a mistake and we would be collecting $600 per year per $100,000. I felt good about helping him out so he didn’t make a fool of himself in front of other bank customers. That was the least I could do.
He emailed me back and said he was sticking to his math. I looked at it again and, low and behold, he was right. I was the fool. I just couldn’t get my brain to calculate that the interest paid on $600,000 could be that low so I wasn’t accepting the answer. I kept multiplying .006 times $600,000 and coming up with $3,600 a year in interest. That would make it worth the hassle of moving the money back and forth, except I was one ZERO short in my calculation, or one ZERO long depending on how you look at it.
Now imagine the difference between 0.06% and say 5% in the scenario we ran up above over a period of time. Wow.