Apr 26, 2010

On the Miracle of Compound Interest and Consistent Investing

Left: No longer nickels and dimes

My wife and I have been much more aggressive in our savings efforts over the last decade, in part to make up for a boatload of cash we lost in a business we owned for most of the 1990s. We have a number of investment vehicles, including an IRA account we set up about six years ago with our insurance agent.

This account has always been more of an afterthought, and we only deposit $50 a month into the account. The convenience factor was an important part of this decision, as we have the house, car, and life insurance taken out via automatic debit on the first of the month.

Because this account is a relatively minor component of the Brooks Retirement Fund, I have not looked at a statement in a few years, and in the back of my head I had the round figure of "about five grand" as its value. I was quite surprised to see that this rather smallish nest egg had eclipsed the $10,000 mark this quarter.

The account also rode out the instability of the market the past few years rather well, given the fact that it is diversified between small cap, large cap, international, and fixed income components. While the lifetime returns have not been earth-shattering (something like 8 percent), the consistent deposits, compounded interest, and reinvested dividends resulted in a steady growth in our net worth in this and our larger retirement accounts.

So if you are reading this and kicking yourself for a failure to follow up on your intentions to start saving money, get up from the computer and get busy today. It took us only six years or so to accumulate ten grand in this single account, and $50-$100 a month is doable by even people with the tightest of budgets if there is enough will to sacrifice.

I suspect that Social Security payments will be a pittance by the time I retire, and I am planning on retiring on my own savings rather than hoping SSI somehow gets fixed. We will likely pass the grand-a-month savings rate pretty soon, and all those brown bag lunches and Goodwill clothing purchases start to add up to serious cash in short order.

Start saving, brothers and sisters.

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