Something To Show Your Kids

[The Colour]

I put this on the Investments forum, and that is where it probably should have stayed, but I just think such an important table should get a little more exposure (but mods please do what you think best)

It's related to what we are always saying about saving early vs saving late, but the table sums this up better than I can explain.

It's from Richard Russel's Rich Man Poor Man

http://ww2.dowtheoryletters.com/DTLOL.nsf

[Disillusioned]

I put this on the Investments forum, and that is where it probably should have stayed, but I just think such an important table should get a little more exposure (but mods please do what you think best)

It's related to what we are always saying about saving early vs saving late, but the table sums this up better than I can explain.

It's from Richard Russel's Rich Man Poor Man

http://ww2.dowtheoryletters.com/DTLOL.nsf

That truly is an impressive example. They should publish it in the papers on the front page.

Edit to add: because then people might concentrate on saving a bit more a bit earlier!

Edited June 18, 2007 by Disillusioned

[dude wheres my house]

My God, no wonder people without a big wad of parental cash cant catch up

Edited June 18, 2007 by dude wheres my house

[dougless]

That truly is an impressive example. They should publish it in the papers on the front page.

Edit to add: because then people might concentrate on saving a bit more a bit earlier!

It wouldn’t be allowed and if it was most people would ignore it.

[benj]

It's related to what we are always saying about saving early vs saving late, but the table sums this up better than I can explain.

I think it's a shame that there's no third column, showing investor C who puts in £2000 per year for their whole life (i.e. starting at 19 and stopping at 65), rather than just the early money or just the late money.

In their case, the total pot after all those years of 10% compounding is £1,918,345, vs. £94,000 invested. So their net profit is £1,824,345 - making them roughly twice as wealthy as investor A (because of course it's a linear equation, and investor C = investor A + investor B in this case). But investor C's money only grew by a factor of 19.4 - which sounds much less impressive than the "66 times outlay" that investor B gets.

The moral of the story is - it's always worth saving money rather than spending it, however old you are and however much you already have invested, if you want to be well-off in the long run.

[AteMoose]

Two things

The interest in this example is 10% after tax for 50 years (wow where?)

Inflation isnt accounted for, ie the example assumes 0% inflation. Inflation is also compounded, and the reason why people get into debt.

Compounding only works if inflation is lower than the 'real' interest rate, if inflation is running at 10% per year and interest is 10% per year your running level.

A real example if you believe current government inflation figures and maximise your 6% ISAs, would give you a return of 1% per year. RPI running at 5%, interest rates at 6%. 1% a year is ALOT less impressivem it will take 10 times aslong to reach the figure. If you believe your inflation is running above the interest rate, then your savings will be eroded (and compounded)

What do you believe inflation is running at? What long term return can you achieve?

Edited June 18, 2007 by moosetea

[Bootstrap]

Great in theory and historically makes one wealthy over the long term - except in recent years, with cheap money so rife, real interest rates (after inflation) and bond yields have been so low that the compounding effect has been seriously compromised. Remove tax from earnings and you're practically in negative territory - especially if you're a higher rate earner.

[The Colour]

The interest is 10% after tax

Inflation isnt accounted for

You're of course right. So compounding doesn't work so well, but I think the main jist is still valid, ie £££s saved early much better than £££s saved late.

Also makes me a little sad I didn't know this when I was a lad.

[sirius]

that doesnt make any sense it today's world. and hyperinflation in the future will wipe out all savings anyway. I would recommend anyone with savings to spend them all right now before they are worthless. maybe buy a house? heeh.

i imagine there'll be quite a few STR's who'll be jumping out of windows when the bank of England reissues the new £1 note and asks for people to trade in 100,000 of their old £1's for one. muhuhhahahha.

[benj]

The interest in this example is 10% after tax for 50 years (wow where?)

Inflation isnt accounted for, ie the example assumes 0% inflation, inflation is also compounded, and the reason why people get into debt.

You're right, inflation eats gains, but this is a fictitious example, with 10% probably just chosen to make the maths nicer. If you pretend that all the numbers are "real" rather than nominal, that is the 10% is on top of inflation and the £2000 contribution is in fact growing every year to keep pace with inflation, then it all works perfectly.

I don't think the intention of the OP (nor of the original author of the table!) was a solicitation to buy or sell any security.

[AteMoose]

You're of course right. So compounding doesn't work so well, but I think the main jist is still valid, ie £££s saved early much better than £££s saved late.

Also makes me a little sad I didn't know this when I was a lad.

ditto, if i had i would have bought as big as house as possible when i was 18 in 96/97, pretended i had an income, rented it out to friends at uni, bought a few more in my second year... alas i was too young and never realised...

Debt Gearing increases the compounding effect, ie borrow 100k a year for a mortgage at 5%, and invest that in something that will give you 8% return...3% a year componded for free, the opposite is true today ;p

Edited June 18, 2007 by moosetea

[Lord Lister]

What this fails to point out is Invester A spent his time between age 18 and 26 enjoying himself, going to parties, getting laid, going on holiday, trying adventerous sports, networking and generally becomming a more rounded individual. Where as Investor B, squirrelled all his money away, had nothing to spend on social life, lived a dull existance, never really developed as a person, became insecure, didn't get the same job opportunities, and earned a fraction of Investor A.

Edited June 18, 2007 by Lord Lister

[Unexpected]

I'd also like to add that there was no way I could get hold of 2000pa between the ages of 19 & 25, whereas after that age it was much easier and these days almost unnoticeable. I would therefore say that if i had to choose option A or option B then I would have been forced to (and would prefer to) choose option A

[scottbeard]

A good, thought-provoking post!

I fully support the idea of saving earlier rather than later: clearly the earlier you start the better your eventual returns will be. However I do think that you have to be a little bit careful when assessing the magnitude of the overall effect.

Having just reproduced those figures in Excel, I can see that it assumes an interest rate of around 10.1%pa - rather more than you might expect to get on your typical cash ISA over recent times. The lower the interest rate, the less difference starting early makes.

Using a 5%pa interest rate the end result is: net £168k for A, net £103k for B, which is a 2 fold return for A and a 7 fold return for B

And note that at 5%pa B may have had better returns overall, but A still ends up with loads more money (albeit having put loads more in).

So in a world where interest rates are between 5% and 10% (a world similar to ours, i'd say) the true situation for most people will be somewhere in the middle.

[Come On Down]

What this fails to point out is Invester A spent his time between age 18 and 26 enjoying himself, going to parties, getting laid, going on holiday, trying adventerous sports, networking and generally becomming a more rounded individual. Where as Investor B, squirrelled all his money away, had nothing to spend on social life, lived a dull existance, never really developed as a person, became insecure, didn't get the same job opportunities, and earned a fraction of Investor A.

Like it.

Consequently he had pschological problems and committed suicide age 35, and having no family, he left the entire estate to the government.

Get saving folks.

[Orbital]

that doesnt make any sense it today's world. and hyperinflation in the future will wipe out all savings anyway. I would recommend anyone with savings to spend them all right now before they are worthless. maybe buy a house? heeh.

you've totally missed the infaltion point? You might end up saving £££s now but in 50 years time your total savings pot might be a pitance compared to your earnings.

My granddad could have invested 2 and six at aged 10 and now at 65 he has a nice nest egg of 10k or whatever. But so what if he's now earning 30-40k a year. A million pounds in 50years time is unlikely to be the life changing sum of money we think of now. Just ask your grand dad how much he used to earn aged 20. Houses used to be a couple of grand not too long ago!

Of course this doesnt mean you shouldnt save, having £1m in then bank in 2060 will be better than having £0 in the bank, but dont expect a "millonaire" lifestyle when you get there....

This is the same reason why people are still happy to buy houses now. At the end of it all Id rather have a house, even if I paid "too much for it", we'll look back in 50yrs and wonder why we wasted so much time arguing about trying to save ourselves 30k or whatever. Imagine if your granddad explained how he wasted hrs a day arguing about saving ten bob. What a difference that would make now...!

Edited June 18, 2007 by Orbital

[bomberbrown]

ditto, if i had i would have bought as big as house as possible when i was 18 in 96/97, pretended i had an income, rented it out to friends at uni, bought a few more in my second year... alas i was too young and never realised...

You would never have got a mortgage, they didn't just hand them out to anyone who could 'fog a mirror'* 10 years ago.

*Thanks to Financial Planner for that little gem, still makes me laugh when I think of when you said that on the radio.

[Guest casaloco]

It's a good model is you assume if DEBT rather than SAVINGS.

[bomberbrown]

you've totally missed the infaltion point? You might end up saving £££s now but in 50 years time your total savings pot might be a pitance compared to your earnings.

My granddad could have invested 2 and six at aged 10 and now at 65 he has a nice nest egg of 10k or whatever. But so what if he's now earning 30-40k a year. A million pounds in 50years time is unlikely to be the life changing sum of money we think of now. Just ask your grand dad how much he used to earn aged 20. Houses used to be a couple of grand not too long ago!

Of course this doesnt mean you shouldnt save, having £1m in then bank in 2060 will be better than having £0 in the bank, but dont expect a "millonaire" lifestyle when you get there....

This is the same reason why people are still happy to buy houses now. At the end of it all Id rather have a house, even if I paid "too much for it", we'll look back in 50yrs and wonder why we wasted so much time arguing about trying to save ourselves 30k or whatever. Imagine if your granddad explained how he wasted hrs a day arguing about saving ten bob. What a difference that would make now...!

I'm not buying now because with historically high house prices and low interest rates, the only way to go is the opposite ways. I'm worried if I over stretch myself now, I might not be able to afford the monthly mortgage payments in the near future, losing my home in the process.

[laurejon]

Given that you could have bought four houses for 2k 40 years ago, that investor would have been better buying four housed cash, and letting them out each year.

[Guest Skint Academic]

It's a good model is you assume if DEBT rather than SAVINGS.

Yeah that's what I was thinking. No wonder it's so difficult getting out of debt once you're in it. My partner and I have decided to get out of debt as soon as we can. Every time we come up with an idea, such as change jobs, become self-employed, move out the country, educate ourselves etc, it always comes down to the issue of how to pay off debts. It's debts that keep you working as slaves for some corporation.

My partner wants to get some savings behind us, own some stocks etc. But I always point out to him that we have to get rid of our debts before anything else. This is why we're so poor at the moment. It's also why we no longer have any future in this country. And once we've paid off debts from university and from moving so much, we'll save up an initial buffer and invest the rest in ourselves so we can start a business.

[Goldfinger]

I think the discussion in this thread boils down to:

(1) Yes, it is good to save so that you have something later in life, and possibly it's good to start early

(without losing out on too much).

(2) It is of foremost importance to maintain the purchasing power of your savings. This is in

fact the most difficult part. What should you invest in (houses, stocks, gold)? When do you need to

shift from one asset into another?

(3) If you obtain a real return on your investment, even better. Your house was sold for more than

the original inflation-adjusted price and you made a profit from renting (after repairs)? Congrats!

My guess is, most peopel struggle with (1). The majority of those who cope with (1) will struggle

with (2). Only very few will succed with (1), (2) and (3).

Edited June 18, 2007 by Goldfinger

[AteMoose]

Yeah that's what I was thinking. No wonder it's so difficult getting out of debt once you're in it. My partner and I have decided to get out of debt as soon as we can. Every time we come up with an idea, such as change jobs, become self-employed, move out the country, educate ourselves etc, it always comes down to the issue of how to pay off debts. It's debts that keep you working as slaves for some corporation.

My partner wants to get some savings behind us, own some stocks etc. But I always point out to him that we have to get rid of our debts before anything else. This is why we're so poor at the moment. It's also why we no longer have any future in this country. And once we've paid off debts from university and from moving so much, we'll save up an initial buffer and invest the rest in ourselves so we can start a business.

with bankrupcy laws, why wait, if the business fails write off all your debts, just make sure you pay off your student debts and replace them with other debts...