BUFFETT.TV
The Power of Compound Interest
Warren Buffett understands the power of compound
interest and and you should too. To illustrate the power of saving your
money right now as opposed to sometime in the future consider the
following illustration.
The following chart illustrates the effect of compound interest over a
40 year time period.
The chart below illustrates 2 different individuals Warren and Fred.
Both can invest their money in a investment account which earns 12% per
year if they so choose. Both 22 years old have an extra $2000 per year
to invest or spend. Warren opens an individual retirement account (IRA)
and starts investing. Fred decides to spend his extra $2000.
Fred continues to spend his extra $2000 per year for six more years.
After that he decides to invest his extra $2000 per year until he
reaches the age of 65. Fred years the same 12% interest a year that
Warren does.
| Age |
Warren |
Fred |
| 22 |
$2250 |
$0 |
| 23 |
$4,509 |
0 |
| 24 |
$7050 |
0 |
| 25 |
$9896 |
0 |
| 26 |
$13,083 |
0 |
| 27 |
$16653 |
0 |
| 28 |
$18,652 |
$2,240 |
| 29 |
$20,890 |
$4,509 |
| 30 |
$23,397 |
$7,050 |
| 35 |
$41,233 |
$25,130 |
| 40 |
$72,667 |
$56,993 |
| 45 |
$128,064 |
$113,147 |
| 50 |
$225,692 |
$212,598 |
| 55 |
$397,746 |
$386,516 |
| 60 |
$700,965 |
$693,879 |
| 65 |
$1,235,339 |
$1,235,557 |
The chart illustrates the value of Warren and Freds IRAs, from they time
they were 22 all the way to age 65.
An important point to keep in mind is Warrens total investment is
$12,000 (($2,000 per ear for the first six years), while Fred's is
$74,000 ($2,000 per year for the last 37 years).
In other words after Warren had invested his total of $12,000. He
stopped investing and never made another $2000 contribution ever.
The difference in investment between $12,000 and $74,000 is huge, yet
they both ended up with the same amount of money. All because Warren
decided to start his investment only 6 years earlier.
As you can see, the earlier you start the better off you will be and its
never too late to start. The important thing is is that you start now
saving now, no matter how large or small the
investment.
Disclaimer: This site is only an interpretation of Buffett's
investment strategies by the site owner. The site is not in any way
connected with Warren Buffett's company and has not received any input
from Warren Buffett directly other than what I have read from reading
books about Buffett. In addition, I am not responsible for any
investment decisions you may decide to make with information provided by
this site. Please do not make any investments without doing the
appropriate research and consulting a registered investment advisor.