The Guaranteed Lottery..
The miracle of compound Interest
Hey guys! So great to have you here :)
This is going to be my first letter, so today I’m going to talk about the power of compound interest but in a way that might actually change the way you invest. Or at least the way you spend money.
Did you know that the LOWEST income group in the U.S. also spends the MOST amount of money on Lottery Tickets?
This might be hard to believe, but take a step back for a second. Unless you consider yourself a part of this this category; It can be hard to imagine what life is like. But if a 5 dollar Powerball ticket has the chances to hit it BIG and change everything, wouldn’t you want even the slimmest chances of everything you want?
Well you see, lets just say that the same family spent the exact same amount of money that’s spent on scratchers, but instead the money is put into the S&P 500 index that pays dividends (if you don’t know what that means I’ll be sure to define some key terms at the bottom).
Now lets take a look at what happens in practice…
Your Total Deposits: $14,700 Total Interest gained: $88,439
Ending Account Balance: $103,147
As you can see, something amazing happens. Over the course of 35 years, returning is at an average of 9% (the historical average of the S&P is around 10% adjusted for inflation, just so we can keep it super realistic).
Over the course of 35 years- yes I know that feels like a lot- the money you invested returned 6x.
Charlie Munger quotes “The first rule of compounding is to never interrupt it unnecessarily”
As long as you don’t think you can time the market (which you can’t do consistently, nobody can) that’s all you have to do. Put those 8 Dollars a week into the S&P Index that reinvests dividends. NEVER touch it or take it out, and you would have an extra $100,000 to retire on, spend, help your grandkids, or do pretty much anything you want with.
Yes there are inherent risks, and this is not financial advice, but lets just take a look at what the S&P has returned over the last 50 + years:
You only have to believe that America will continue to survive and thrive and you will have nothing to worry about. You can see the short term volatility on the chart above but like Munger says, don’t interrupt it. And if none of the really clicks with you, I’ll put it like this:
Your money today could be worth a lot more in the future. Most people just don’t have the time to wait for it.
As you can see. Small changes → Big Effects.
I hope you enjoyed my first post and be sure to share it with your friends if you feel like it :)) -have a great day and enjoy the moment.
Glossary for beginners:
S&P index: typically referred to as the S&P 500 or the SPY is a basket of the 500 biggest companies in America
Dividends: Earnings made by the company or companies you invest in , paid out to you monthly, quarterly, or yearly. ( there are other Time intervals but for our purposes they’re not too important)