Is it really true, asks Aaron, my personal assistant, that I could become rich?
Yes, I say, if you do one simple thing. Come off it, Richard, that can t be true. Enter Alison, Aaron s younger friend. Alison is a hairdresser with pink, punkish hair. If it was easy, we d all be millionaires. You know as well as me that there are a few people with all this, she waves at the swimming pool, lush gardens, and tennis court, and then there are all the rest of us, struggling with money.
Aaron, Alison, and I are basking in November sunshine, sip- ping ice-cold drinks at my house in Spain. I make the most of my captive audience.
You re right, I tell Alison, most people ” even with big jobs and incomes to match ” don t have much spare cash. I don t say it s easy to accumulate money. I just say it s possible for everyone.
So what s the secret? Aaron is 23, right? Assume he saves $200 a month Pigs will fly, said Alison. Maybe, I say, but imagine he saves and invests $200 a month, and it grows at 10 percent a year for 42 years, until he s65. How much would Aaron have then? $200 a month is $2,400 a year ” times 42 is $100,000 and change. But you have to add the growth on top.
So, I face Aaron, what s your guess? Maybe double that. $200,000? Alison? I m no good at sums, she says, but it couldn t be that much. Maybe $150,000?
The right answer, I reveal, is over $1.4 million. They re stunned.
But that assumes Aaron could save 10 percent ” I don t believe that
Fine, I ll come to that later, I interrupt, but Alison, what about you?
Harrumph, she says. Nobody earns less than me. You know how little hairdressers get? Worst-paid profession. Wouldn t be worth saving.
How old are you? How much do you earn? Eighteen. $16,000 a year. A tenth is $1,600. If I saved that, which I don t think I could, what would my nest egg become?
I produce calculator and paper. The computer is faster, but I want to demonstrate the sums. Aaron fetches more drinks. When he s back, I m ready.
Whaddyathink? If Alison saved $1,600 a year till 65, what would she have?
Aaron grabs the calculator. $1,600 times 47 years equals around $75,000. He multiplies that by five, his estimate for compound interest. $400,000, he guesses.
No way, Alison shrieks. Can t be more than $250,000. Have I got news for you, I tell her. Clich s seem to be expected. The right answer is $1.5 million.
Impossible, she snorts. I earn much less than Aaron, there s not much difference in our age, you say I d get more than him. Calculator must be glitched.
No, I say. It makes sense. The compounding is so powerful, just a few extra years make all the difference. It s more important to start saving early than to earn a lot.
It s all just numbers until you say how we save 10 percent of our pay, said Alison. Don t see how we can, we always spendmore than we earn.
I ll come to that later, I said. And I will. But first, should we care about money?
No comments:
Post a Comment