A Little Life Lesson Shared

A little story about a blown investment opportunity to consider, but first a little information on how compound interest works.

Investing only $228.00 in a fund that realizes an annual compounded interest rate of 8.0% for 60 months versus simply leaving $200.00 a month under your mattress for 60 months will result in an increase in the money invested of $107.01. ($200.00 saved over a 60 month period w/o interest = $200.00 vs. $200.00 invested @ 8.0% interest compounded annually over a 60 month period = $335.01)

Yes, that is a stupid little example of how interest compounded annually works, but bear with me here. 

That little example was one I related to a person who I was acquainted with over 11 years ago, when that person inherited, after all taxes and estate debts were paid, the princely sum of $228,000.00

I was trying to illustrate to this person how compound interest could make ordinary people wealthy, and makes wealthy people even wealthier.

That illustration was evidently not very effective, as I ran into the heir in question recently (it had been about 10 or so years since I last seen or even heard about them) and after sharing some polite catching up chit-chat, they revealed to me that they are pretty much back to where they were financially before they received the $228,000.00.

The heir (who was 42 years old at the time of the inheritance) told me they had taken the money and treated their family to a couple of new cars, a few very lavish vacations, and some extravagant purchases, with the end result being...

...the inheritance was completely spent in just over two years time.

Now consider what could have been. If the heir had continued to live as they had been (kinda lower middle class), and invested the inheritance in a fund that realizes 8.0% in annual compounded interest, and kept it parked there for at least 60 months, the $228,000.00 would have grown to $335,006.08.

Even after taxes and fees the money earned would have exceeded $80,000.00 or so - enough for a couple of new cars at least, and maybe a choice vacation or two, and without having had to spend 1 cent of the $228,000.00.

If they had kept the $228,000.00 in the fund from the day they received it until today (11 years and 3 months, so 135 months) it would now total $541,941.11

Over half a million dollars. Without doing anything but taking money received as an inheritance and forgetting about it for a tad over 11 years.

In 20 years the money would have grown to over a million - $1,062,698.23 to be exact. Keep that million+ in a fund that realizes 8.0% in annual compounded interest and it earns just over $85,000.00 a year.

That's more than 75.5% of the working people in the United States earn in a year.

And the million would still be there.

So, if you should ever have the good fortune to inherit $228,000.00, heed this lesson, and heed it well. 

I know I would.