Keep an eye out for it.

Regarding inflation and savings: the article above points out that while savings interest rates are at an all time low, so for the moment is inflation, meaning that we actually are seeing real returns on savings for once.

However, seeing that inflation usually averages 3%, that means our currency loses half its value every 18 years. Bemoaning this fact doesn’t help anyone, in fact it is the strongest argument for stock investing. While returns may not always look great, growth is the only way to preserve savings against inevitable decline, and there has never been a 30 year period where the stock market returned less than 8%. That being said, investor error can cause you to get a lower rate of return which is why Matt correctly recommends index funds for people who don’t consider themselves investors.

@Mrs. Money: patience my dear… markets go up & markets go down, but it is the average with which we need to concern ourselves.

Also, what is your rate of return of your retirement accounts?

The impact of inflation, the differences between real and hypothetical etc… are all subjects for future posts!

Keep up the great work!

In the entirely hypothetical numbers used in the examples, I am assuming a 3% inflation rate making your “real rate of return” somewhere around 4.5% after inflation.

You raise a valid point – you won’t get 7.5% interest per se – but 7.5% compound growth isn’t terribly unlikely on your total portfolio IMO.

Lost the in the discussion of the beauty of compounding in savings accounts is the ugiless that inflation rates “compound” also. The value of the money in the account at the end needs to be discounted by the average inflation rate, COMPOUNDED over the time you are looking at. Whenever I see one of the beautiful charts showing the growth of X at Y% per year for Z years, I wish they would discount it using real (not reported) inflation rates to show that, after taxes, it can be a struggle just to break even on a real basis. Dont forget that you pay taxes on nominal gains, not real gains.

Stock investments are IMHO too volatile to give an accurate yearly ROR — you’ll get a different number for the ROR for every period you choose. For example, we have a negative annual ROR for the S&P 500 over the past 10-years, and there is no guarantee you will even get a positive ROR _ever_.

I, like Daniel, read this as savings accounts, not investment/retirement accounts because that is where compounding makes sense (at least to me), because the rates are always positive, and most of the time are known up-front.

The trick with paying off debt early, is that you don’t get a statement in the mail every month showing you the savings. I’ve paid off (early) a credit card, student loan, a car, and am now working on the second mortgage. Had I not paid those debts off early, I would still have all of those bills today.

I’d need to get the old papers, but I estimate that I’m “saving” about $600 a month in interest payments, because those debts are now gone. I’m also ‘compounding’ those savings, by using them to pay down the next debt in the snowball — so ‘compound interest’ works the same for paying debt off early as it does for savings accounts. Actually it works better because debt rates are much higher than savings account rates — so it makes sense to get the best rate for your dollar and pay down the debt.

My current loss in interest to banks is $550 a month now, and every month the number gets lower and lower — eventually the banks will be paying me (about 4 years from now).

Good point on the 7.5% savings rates — they are non-existent. But, if you have a 7.5% loan, then paying $6k a year extra on it will net you the same savings.