Little Engines And Big Retirement Accounts
When it’s my turn to tell the bedtime stories in our family, I have a limited but highly effective arsenal of tales guaranteed to make my daughter’s eyelids grow heavy and close within ten minutes. I know nothing of hypnotism, but I’m convinced that it’s the cadence and the tone with which I read these stories that makes them so effective as a sedative. One of Caroline’s favorites is The Little Engine That Could.
It is the stirring saga of a small, underpowered steam locomotive that bravely volunteered to pull a long train over a high mountain, and could only accomplish the seemingly impossible task by repeating the optimistic chant, “I think I can, I think I can.” Sure enough, through hard work and positive thinking, the objective is met and the little engine emerges a hero. Unfortunately (or fortunately, depending on your point of view), little Caroline usually falls asleep before the part where the little engine proudly chugs into the train yard to the cheers of his railroad pals.
During our accumulation years, while we are still working and saving, we are called upon to haul freight uphill, as it were, in preparing ourselves for retirement. In our younger years, it may be a struggle to chunk away the money we know we ought to save. We are hardwired for having fun. Every cell in our body and every neuron in our brain is thinking of ways to live beyond our means.
Then along comes a family, and our resources seem to be stretched as thin as cheap cellophane. But, like the little engine that could, we give it a go. We chug along. We stick to the program. Then, a magical thing happens along the way. Slowly but surely, we get something called momentum. Our capacity to earn becomes greater the more experience we acquire. Our little nest egg begins to grow exponentially; that is, the bigger it gets, the bigger it can get.
Because of the miracle of compound interest, what started slowly begins to pick up speed. We keep pressure in the boiler, we keep our eyes focused on our goal and before long, the Law of Inertia begins to work in our favor. Our money is begetting money, which, in turn, begets more money, until we are at last on top of our personal mountain saying, “I knew I could, I knew I could.”
Inertia and compound interest
Galileo, a 17th-century scientist, figured out that it’s easier to keep something rolling once you have it rolling than it is to get it rolling in the first place. Sir Isaac Newton came along a few years later and named it the Law of Inertia. A body in motion will tend to remain in motion until it is acted upon by an outside force. It’s the same way with money.
The first few years of accumulating money are the hardest. After that, if we keep on accumulating and investing wisely, it gets easier. Have you ever heard the saying, “The rich get richer?” Well, they weren’t kidding. It’s a natural law of economics that the more we have, the faster it grows, especially when compound interest is involved.
The power of a penny
The story is told (fictional, I’m sure) of a job interview where the applicant is offered a job and asked to choose between two pay plans. One compensation plan would pay a straight $1,000 per week. The second plan would pay you a penny per day, doubling every day. That’s right, first day on the job nets you a penny. That amount doubles on day two and every day thereafter so that by the end of the first week, you have earned a whopping 64 cents. Bad deal, right? Not really. With the penny-doubling-every-day pay plan, you will have earned over $5 million by the end of the month!
If you’re skeptical of the math, just get out your calculator and a calendar and check it. It’s true! By the 30th day, you have 536,870,912 pennies. That’s a cool $5,368,709.12.
A penny doubling every day is, in essence, earning 100 percent interest paid daily. While that is unrealistic, it does illustrate the value of momentum when it comes to money — how even a small amount, over time, can lead to a surprisingly large growth through the miracle of compound interest.
Albert Einstein is often credited with saying, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who does not, pays it.” Whether the German-born American physicist actually said that or not is still debated, but it doesn’t negate the truth of the quotation. Compound interest occurs when interest is added to the principal, so that from that moment on, the interest that has been added also earns interest.
Do you already have momentum on your side in your retirement plan? No time like the present to explore that a little bit.
Coach Pete and his team offer complimentary retirement strategy sessions to Chapelboro readers. Contact them at 919-657-4201.