I first watched this video when I was 17 years old. Since then, I make sure I re-watch this every year. This has been one of the most important videos that I've seen. Thank you so much!
Thanks Jay. Lauren and I used to listen to his show everyday. It gets repetitive after a while, though. It's amazing to think how many people he's helped. It has to be thousands of one on one phone calls alone!
To be fair, I did have a math teacher teach us this in high school (with cool, slideruley type tables donated by a bank) , and I had an economics teacher show us how to follow and read stocks (in the newspaper lol).... BUT I remember this because it was INTERESTING to ME. My friends don't even remember covering these things but I KNOW they had the same classes as me. So I'm going to suggest that this stuff is covered in school more often than people think, its just it goes in one ear and out the other and is quickly forgotten. We covered taxes also (another common thing said to "not be covered in school") which I'm sure had the same result Non interesting= quickly forgotten. I went to an average public school.
+VTECsqznN2O Interesting. I was never taught compound interest (in the financial sense) or taxes. We talked about compound interest in statistics, but never made the connection to personal wealth.
In Virginia a class called "Economics & Personal Finance"has been required for high school graduated for a few years. Taking Family & Consumer Science classes (formerly Home Ec) will also teach personal finance.
I've just started an index fund about a year ago and I'm 17, so hopefully some good will come of that. But at my age, why people aren't saving for later really says something about our quick-paced, instant-gratification society.
+Ryan Gaus Great work bud! You are a true weirdo, standing out from a crowd of ignorant peers. Keep it up, and don't miss the forest for the trees. Ignore the whole 12% vs. 7% drama. Fact is, time is the key. Ride it out for the long haul, and ignore ANY & ALL investment advise that comes from WSJ, Fox News, CNN, MSNBC, ABC, Fox, CBS, etc.
+Mike and Lauren +Kevin R. My goal is to just keep the money in there for as long as possible, and try to contribute $700-$1000 a year. My dad has drilled all that stuff into my head about percentages!
I wish I there were people like you in my life 35 years ago! I have been lucky in the last 10 or so years to have had some good advice, but it has meant that I have had to double down and save much more than if I had been serious about saving when I was first starting out. However, even the meager bit I was saving from my early 30's on, has grown significantly considering the amount saved. That is compounding!
They do teach this in school, what they don't teach you is how to invest.... Like, invest in what? Stocks? Bonds? Other? Find a brooker? Can I do it entirely on my own? What is an IRA? How do I take money and actually invest in something? How do I know if it is a good investment (like your +12%) or a horrible investment (like -36% or worse)?
wtf someone deleted my post? whatever less knowledge for them i supposed, u understand that not all information is equal, some are great and life changing others are horrible and life changing, for example when my parents told me to save my money for college, yeah it was great information for them back then but now me saving money is literally the worst thing i can do(other than spending it on blow) so i forgot about their advice and start investing, same with what information ur reading now, people are literally telling you that 12% isnt realistic, yeah not duh if you have that mindset, and they're are trying to give you that mindset which would change your life entirely. in my opinion 36% a year is completely doable, it might be hard but its doable, as long as you have the right mindset, make a consistant winning strategy and read, read, read, then your going to become a millionaire within 20 years. And btw this startegy that im giving you works best when your trading short term(like buying a stock and selling it a week or two later)
Compounding interest works great when you have 150% confidence in the counter-party, and you control the rules of when you can access those funds. In today's debt based monetary system, counter-party risk is compounding, and governments are continually changing pension rules. Hope you are keeping an eye on both.
The message was crystal clear! Great vid y'all. Leave it to YT commenters to get completely distracted by the details (%). BTW, I dug the logo overlay at the end of the video. Was that new, or did I just miss it in prior videos? Good branding too. Nice effect.
Thanks for making this video you guys! I was going to hold off on my 401k contributions at my new job for another 5+ years because I figure I have student loan debt, why not pay off that?? But that's at 5-8% interest. My 401k is an immediate 6% raise at 100% I invest, plus compounding interest. Great reminder on the power of compounding interest :)
I actually had a personnel finance class in high school which did briefly talk about compound interest. The way the teacher explained it was with the rule of 72. Divide 72 by the annual percent gain, and that's the amount of years it takes to double your money thanks to compound interest. So, with 4% rate, it takes only 18 years instead of the 25 years one would expect without compound interest. I also remember seeing a story similar to the Dave Ramsey one in a book by Clark Howard when I was younger. Unfortunately, I wasn't able to invest any since I was trying to save as much as I could toward college to minimize and pay off student loans, then save up for a car (that I paid cash for). Anyway, you're right, this is good information. It's not a way to get rich quick, but compound interest is certainly a powerful way to grow wealth, or to lose it if you're on the other side of it.
12% annual return is not realistic. Fact is, if you put your money in something safe, after taxes on income, it's unlikely that you are making up for real inflation (and real inflation is about 1% higher than government stated inflation). So, work 1000 hours, invest it for 20 years, and what you have in 20 years is less than 1000 hours worth of income. You should still save, but don't buy the bullshit that your investment will grow in value. It only did that during the 80s and 90s.
+Matthias Wandel Amen to that. I invested over $40k in my 401K, company matched 3%, and when I left the company, the 401K was worth $14K. Great investment. Compound interest is complete crap. Savings accounts pay 1/10%. CD's pay 1 1/2%. Stocks crash all the time (look at my spectacular 401K, and that was split up evenly in so-called "safe" funds and medium risk... Zero in high risk funds.)
+Matthias Wandel The key words in your statement are "something safe". Most people can't invest in "something safe" early in their careers if they hope to compete with inflation. We must invest in higher risk equities and ride the roller coaster for 20+ years in order to have a chance at earning more than inflation, albeit only slightly more. Is there any viable alternative for the average individual? Vanguard Index funds are the best option I've found, using the advice from the book Unconventional Success by David Swensen.
No offense, but you guys are ridiculous. 20%+ is EASY! You aren't taxed on it till you take it out of a fund, so that compounds BEFORE taxes. This is basic grade school math people. If you walk around like an idiot expecting just anyone to earn you money without you doing any due diligence, it's time to grow up. You have the FUCKING INTERNET AT YOUR FINGERTIPS, GO STUDY SOMETHING!!! BTW... Your ignorance is what's keeping you down, not the 1%. I have friends who've made more than 40% THROUGH BOTH recessions.
Leftism11 if you put it in an s&p following fund and leave it there for 30 years, you're not going to see any return. If you take some responsibility, and make a little effort, move the majority into the best performing funds every few months 12% isn't unreasonable. If you want to take a little risk and do a little research and actively invest your money 20% apr I would say should be a minimum goal. There's a reason why people managing millions and billions of dollars are payed so much, but I'm guessing you don't have millions to invest. Buffet is investigating billions and that's why he can't make higher returns, returns don't translate linearly. But investing a few $10k should make easy double digit percentages. Yes there's risk. If you want a guaranteed return your not going to make more than 3%, educate yourself in proper risk management, question your assumptions, test with low risk and go find some 20%+ returns. It's your money, it's not going to make its self for free. Free and "guaranteed" will maintain the rate of inflation, IF YOU'RE LUCKY. If you tell yourself better returns aren't possible you're almost certainly going to prove your self right. If someone tells you that's a bad investment, maybe you should look there. "bad" probably means risky means profit potential. But don't gamble, there are unknowns but there are also statistics and you can keep things in your favor if you keep an eye on things and following strict risk management rules. Don't invest in something because you "like" it. If you can't give a detailed reason for your investment with historical examples don't do it unless you want to loose money. If you have money to loose, hey gambling is fun.
HI there! At school today we had a substitute and his name was Mr.reed! He showed me your channel and said he was friends with you. So i wanted to tell you that mr.reed says hello! thanks
great video in explaining time value of money. I'm wondering, how are the calculations , accounting for potential market crashes (like in 2001, 2009, and sort of 2015). markets are hard to predict, understandably. but considering these, a continuously compounded finance as with Ben wouldn't exponentially as in this video. I have no idea
While video is instructive two of the numbers or variables used in this lesson are unrealistic. The assumed 12% annual rate of return to occur every year from age 19 to age 65 is simply ridiculous and unrealistic. An investor would be a fool to think he or she could achieve such a consistently high rate of return over time. No 19 year old potential "Bens" out there should reasonably expect to reach over $2 million after only investing $16k. Arthur is only investing ($78,000 / 39 years =) $2,000 a year. That's chump change and not enough to max ($5,500) out his IRA. Sure starting early is good but don't expect 12% and invest at least 10% of income, the more the better.
12% is chump change, i can easily make 36% a year with some day trades, the only reason people think that 12% is because they arent experienced to do anything but buy an index fund.
Mutual fund company like Fidelity or Vanguard or discount brokerage. You want a broad based index fund to represent the majority or bulk of your investments. A S&P 500 Stock Market Index fund is a great start. Avoid fees such as annual account fees and transaction fees, LOADed mutual funds and high expense ratios.
PLEASE GIVE ME ADVICE --- I'm 13, looking to educate myself financially during my teen years, and I live in England and is Compound Interest available here?
I think the reason they don't teach it directly is because it's quite obvious once you learn about interest and how banks work which you do learn in school.
I've often wondered about comparing a strategy of remaining fully invested at all times and investing all new cash immediately versus saving cash and buying even at minor market dips - let's say 5-10%. Is one strategy more successful? When a market crash does occur, buying a large amount of stock is most advantageous. As one of your previous videos mentioned, when you climbed to the top of the wooden tower, your investments made at the bottom of the market crash have more than doubled since. These are unusual times in that interest rates are very low and the only way of generating income is either increasing yield or increasing the stock/bond ratio.
+Shahrukh Bakar There are a lot of studies on this subject. www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work?stop=true This is a good one I like. In short, timing the market generally never works in your favor over the long term. Chances are you won't sell at the top(meaning you miss gains), and you won't buy at the very bottom(meaning you miss potential gains). The study shows if you can see into the future, you win the most, but the 2nd best is lump sum investing, and 3rd is dollar cost averaging. TBH, what I would do, is if I was over 30, I'd have 10% of my portfolio in bonds, and if the market crashed say 20% or more, I'd move that 10% to equities.
+Shahrukh Bakar I know...It's so tempting! Obviously since we're do for a market correction, we should hold off? But the research shows (I think vanguard did one too) we miss out on the bull markets when we wait on the bears. We're in that boat right now though.
Mike and Lauren Pretty much all big brokerages have done their own studies on this subject and came to the same conclusion. Shwab and Vanguard are the two most extensive studies(I linked the shwab one in my reply to Shahrukh). It is difficult to stay head strong when the data suggests something we view as illogical, and many people can't do it. However for you guys especially, trying to retire early, it is paramount you follow the data and not the emotion. As well as viewing market drops as an opportunity. The market goes down 50%? Do everything you can to get extra income to invest and make a huge profit over the following 5 years.
Dear Mike and Lauren, you need to do some due diligence by searching for the origin of this quotation about compound interest - even though the sentiment of the quote is true - you will find that it is not attributable to Albert Einstein!
I have been playing with stocks, high risk, high reward. But to be "safe" i think TheLendingClub has been awesome! Super fun, and basically you can't loose money if you follow the most basic rules. If you are on here, trying to learn, you will easly find the basic rules for the lendingclub!
Wait I'm confused, you don't get interest on a stock, right.... You only get interest in a savings account, but the interest in a savings account is super duper low!
Unless the stocks pay a dividend. For example, Armour REIT pays $0.19 per month and costs $25 at the time of this posting. If you put $5,000 into it, you'd have 200 shares. After a month, you'd get $38 in dividends, and you could buy 1 more share if the price hasn't changed too much. Next month you get $38.19 in dividends. There's also a system called DRIP where you can have a company reinvest the dividends for you, often with a discount, and you can get fractional shares. If Armour has such a program, you would have gotten 1.52 shares. I'm not suggesting Armour, I only used it as an example because it happens to have a nice round number (at this time) and pay monthly dividends.
I would stop listening to Dave Ramsey if he gave this example. First, people increase contributions over time, 2k in 40 yrs is not the same as 2k today (e.g. it's worth 900). So instead if we increased our contributions at a flat 2% inflation scale every year or instead decreased the investment assumption by 2% we'd have a real term investment account. Second, 12% is ridiculous. If you use a realistic 8% instead you get 462k and 516k instead. And if you apply both a realistic return and a real return metric by using 6% plus assume contributions are not made beginning of each year but throughout the year you get 198k and 299k. Compound interest is amazing but consistently investing and staying invested is the real solution not investing for a few years and assuming you'll return a similar % as Warren Buffett.
Where are these compound interest opportunities? This is great in theory but there is no sure way of getting anywhere near 12% compound interest on your investment.
+watafucup Mike said "aside from the 12% return...in that story." The point of his message was not that 12% was a realistic return goal, but that compound interest is what makes investing worth it. You don't have to earn 12% in order to take advantage of compound interest. Invest money in good index mutual funds and over the long term you will reap the benefits of compound interest. It's not magic and it's not a scam.
+Mike and Lauren That's fair enough, on second reading of my post I didn't want to seem so negative. I always enjoy watching your videos. I suppose I'd like to see a video of options on where to invest, I don't know if I trust vangaurd funds. I'd also like to know a good place to learn about this stuff because there is so much on the internet that is shady...
+watafucup No problem. A lot of the resources we would recommend are going to suggest low-fee index investing like us. We use 7% returns in our calculations. A good way to tell if you should trust an investing resource is if they are selling you something. I trust vanguard because it's everyone BUT vanguard recommending them. My stock broker who's going to be making a 5% commission? Not so much...
NO no no . This is wrong. The example is completly different if you consider a more realistic grow 4-5%. Compound Interest is a great thing....but your example consider a 12% grow... With the 12% Grow I could retire in 10 year at 38 age savings 2500$ month.
12% return assumption is absurd. DAVE Ramsay knows how to motivate people to eliminate debt but he doesn’t know squat about investing and financial modeling.
Another one of your videos helped me figure it out. You two are AWESOME! I'm making my way through all your videos, then I'm definitely subscribing!! You guys are super informative and inspirational!
Yes you should start investing. A Roth IRA is likely an excellent place to start. Look for low expense ratio Index funds like a Total US Stock Market Index fund or a S&P 500 Index fund as the foundation of your investing portfolio. Bogleheads' Guide to Investing The Four Pillars of Investing
12%? Sorry guys, it's just not going to happen. Not only is it not going to happen, but you also have to expect periods of ultra-low inflation rates. Or even negative interest rates (yes, it does happen.) My advice is to invest in your skills and knowledge, and solid, non-depreciating assets. Or depreciating assets that multiply your working ability. There's also the opportunity cost of sinking money in to "investments" that only return inflation (if that), and are subject to taxation and account-keeping fees anyway. e.g. putting that money in to a mortgage, thereby reducing your total interest bill. Or a tradesman buying tools that will have a multiplier effect on income. etc.
What the hell? Is this what they teach is school? What are you investing in, CDs? Do you think the market is random? How many investment options do you think there are? If you're making less than 10% there's a problem. I'd be pissed with less than 12% and if you want to educate yourself a little bit and do some research and make your own investments 20% is a cake walk until you get to investing millions. I think you guys are listening to bad investors you want to convince you that's the best they can do so they can take the rest of your money.
shadfurman You are not making 20% consistently over many years. You'd have to do heavy speculation for long term gains of that order, and that means high risk, and years of low or even negative returns.
w0mbles you might have a year here or there where you make less but some years you might make a lot more. I don't know what type of investing you have in mind, but 20% is not a ridiculous goal. In a mutual fund, sure, 10-12% is more reasonable.
w0mbles that's exactly my point, idk why you guys don't get this. You don't leave money in one investment in perpetuity. When it's making good returns you put more money in when it's making less you move it to something that is. Would you keep a house you weren't living in that you couldn't rent at a profitable price?! I am starting to think you guys don't like money, or maybe you've just been indoctrinated to believe you can't make decent returns. If you want to trade a few dozen hours of work for millions in retirement that's up to you... Or you can decide 5% isn't acceptable and figure out how to fix it. And mutual funds are not the only possible investment, it's just safer because it's diversified, but that's no guarantee.
+MarcheMellos Absolutely do not count on 12% return on your investments. That does happen, but it's rare enough that counting on it is foolhardy. A better estimate of stock market return (IRA or 401(k)) over a lengthy period of time might be 7%.
Great video! I started getting into Dave Ramsay this year. I am unfortunately behind on my investments, but because I am becoming more frugal and minimal I am confident I can catch up! Thanks for the inspiration and keeping us focused! -Frugalnev.com
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The best time to plant a tree is 20 years ago. The second best time is now.
Zifer yeah let me invest when i wasnt even born yet
Wow.. I'm sharing this far and wide.
WHY DIDN"T SOMEONE TELL ME THIS 25 YEARS AGO!??!
+Paulo De Oliveira Thanks!
I first watched this video when I was 17 years old. Since then, I make sure I re-watch this every year.
This has been one of the most important videos that I've seen. Thank you so much!
So how are you doing now?
great im 16 so im gonna start investing
The power of compound interest is crazy. I learned about it with the "doubling penny" story.
I'm a former back seat Dave Ramsey sponge as well. Good message here :)
Thanks Jay. Lauren and I used to listen to his show everyday. It gets repetitive after a while, though.
It's amazing to think how many people he's helped. It has to be thousands of one on one phone calls alone!
To be fair, I did have a math teacher teach us this in high school (with cool, slideruley type tables donated by a bank) , and I had an economics teacher show us how to follow and read stocks (in the newspaper lol).... BUT I remember this because it was INTERESTING to ME. My friends don't even remember covering these things but I KNOW they had the same classes as me. So I'm going to suggest that this stuff is covered in school more often than people think, its just it goes in one ear and out the other and is quickly forgotten. We covered taxes also (another common thing said to "not be covered in school") which I'm sure had the same result Non interesting= quickly forgotten. I went to an average public school.
+VTECsqznN2O Interesting. I was never taught compound interest (in the financial sense) or taxes. We talked about compound interest in statistics, but never made the connection to personal wealth.
I've been binge watching these videos and I'm starting to really appreciate the simplicity and genius behind them. Thanks.
In Virginia a class called "Economics & Personal Finance"has been required for high school graduated for a few years. Taking Family & Consumer Science classes (formerly Home Ec) will also teach personal finance.
I've just started an index fund about a year ago and I'm 17, so hopefully some good will come of that. But at my age, why people aren't saving for later really says something about our quick-paced, instant-gratification society.
+Ryan Gaus Great work bud! You are a true weirdo, standing out from a crowd of ignorant peers. Keep it up, and don't miss the forest for the trees. Ignore the whole 12% vs. 7% drama. Fact is, time is the key. Ride it out for the long haul, and ignore ANY & ALL investment advise that comes from WSJ, Fox News, CNN, MSNBC, ABC, Fox, CBS, etc.
+Kevin R. ^^^What he said :) Specifically about ignoring the 12% vs. 7% drama.
+Mike and Lauren +Kevin R. My goal is to just keep the money in there for as long as possible, and try to contribute $700-$1000 a year. My dad has drilled all that stuff into my head about percentages!
Ryan Gaus Very cool! We're going to be doing a video for young investors next week.
I wish I there were people like you in my life 35 years ago! I have been lucky in the last 10 or so years to have had some good advice, but it has meant that I have had to double down and save much more than if I had been serious about saving when I was first starting out. However, even the meager bit I was saving from my early 30's on, has grown significantly considering the amount saved. That is compounding!
They do teach this in school, what they don't teach you is how to invest....
Like, invest in what? Stocks? Bonds? Other?
Find a brooker? Can I do it entirely on my own? What is an IRA? How do I take money and actually invest in something?
How do I know if it is a good investment (like your +12%) or a horrible investment (like -36% or worse)?
glad I'm 15, and learning about all of this now.
u still wont be successful with these types of people teaching you
Internet Expl no one said anything about being successful, I just said I'm glad I know this little bit of information now, instead of later.
Jacqueline Rogers don't let some internet browser falsely determine your future success when they don't even know you ^_^ wishing you all the best
wtf someone deleted my post? whatever less knowledge for them i supposed, u understand that not all information is equal, some are great and life changing others are horrible and life changing, for example when my parents told me to save my money for college, yeah it was great information for them back then but now me saving money is literally the worst thing i can do(other than spending it on blow) so i forgot about their advice and start investing, same with what information ur reading now, people are literally telling you that 12% isnt realistic, yeah not duh if you have that mindset, and they're are trying to give you that mindset which would change your life entirely. in my opinion 36% a year is completely doable, it might be hard but its doable, as long as you have the right mindset, make a consistant winning strategy and read, read, read, then your going to become a millionaire within 20 years. And btw this startegy that im giving you works best when your trading short term(like buying a stock and selling it a week or two later)
Compounding interest works great when you have 150% confidence in the counter-party, and you control the rules of when you can access those funds. In today's debt based monetary system, counter-party risk is compounding, and governments are continually changing pension rules. Hope you are keeping an eye on both.
The message was crystal clear! Great vid y'all. Leave it to YT commenters to get completely distracted by the details (%).
BTW, I dug the logo overlay at the end of the video. Was that new, or did I just miss it in prior videos? Good branding too. Nice effect.
+Kevin R. Thanks Kevin. Yea, we've been doing the logo for a bit. Thanks for noticing.
+Kevin R. Quick edit: that was not meant to be sarcastic. Typing is hard....
Mike and Lauren
Ha! Didn't read it that way. But thanks for the clarification.
Thanks for making this video you guys! I was going to hold off on my 401k contributions at my new job for another 5+ years because I figure I have student loan debt, why not pay off that?? But that's at 5-8% interest. My 401k is an immediate 6% raise at 100% I invest, plus compounding interest. Great reminder on the power of compounding interest :)
I actually had a personnel finance class in high school which did briefly talk about compound interest. The way the teacher explained it was with the rule of 72. Divide 72 by the annual percent gain, and that's the amount of years it takes to double your money thanks to compound interest. So, with 4% rate, it takes only 18 years instead of the 25 years one would expect without compound interest. I also remember seeing a story similar to the Dave Ramsey one in a book by Clark Howard when I was younger. Unfortunately, I wasn't able to invest any since I was trying to save as much as I could toward college to minimize and pay off student loans, then save up for a car (that I paid cash for).
Anyway, you're right, this is good information. It's not a way to get rich quick, but compound interest is certainly a powerful way to grow wealth, or to lose it if you're on the other side of it.
+excaliber009 Good point about the rule of 72. Thanks!
12% annual return is not realistic.
Fact is, if you put your money in something safe, after taxes on income, it's unlikely that you are making up for real inflation (and real inflation is about 1% higher than government stated inflation). So, work 1000 hours, invest it for 20 years, and what you have in 20 years is less than 1000 hours worth of income.
You should still save, but don't buy the bullshit that your investment will grow in value. It only did that during the 80s and 90s.
+Matthias Wandel Amen to that. I invested over $40k in my 401K, company matched 3%, and when I left the company, the 401K was worth $14K. Great investment.
Compound interest is complete crap. Savings accounts pay 1/10%. CD's pay 1 1/2%. Stocks crash all the time (look at my spectacular 401K, and that was split up evenly in so-called "safe" funds and medium risk... Zero in high risk funds.)
+Matthias Wandel The key words in your statement are "something safe". Most people can't invest in "something safe" early in their careers if they hope to compete with inflation. We must invest in higher risk equities and ride the roller coaster for 20+ years in order to have a chance at earning more than inflation, albeit only slightly more. Is there any viable alternative for the average individual? Vanguard Index funds are the best option I've found, using the advice from the book Unconventional Success by David Swensen.
No offense, but you guys are ridiculous. 20%+ is EASY! You aren't taxed on it till you take it out of a fund, so that compounds BEFORE taxes. This is basic grade school math people. If you walk around like an idiot expecting just anyone to earn you money without you doing any due diligence, it's time to grow up. You have the FUCKING INTERNET AT YOUR FINGERTIPS, GO STUDY SOMETHING!!!
BTW... Your ignorance is what's keeping you down, not the 1%. I have friends who've made more than 40% THROUGH BOTH recessions.
+shadfurman We welcome your RUclips video showing your 20%+ annual returns over 30 years.
Leftism11 if you put it in an s&p following fund and leave it there for 30 years, you're not going to see any return. If you take some responsibility, and make a little effort, move the majority into the best performing funds every few months 12% isn't unreasonable. If you want to take a little risk and do a little research and actively invest your money 20% apr I would say should be a minimum goal.
There's a reason why people managing millions and billions of dollars are payed so much, but I'm guessing you don't have millions to invest. Buffet is investigating billions and that's why he can't make higher returns, returns don't translate linearly. But investing a few $10k should make easy double digit percentages.
Yes there's risk. If you want a guaranteed return your not going to make more than 3%, educate yourself in proper risk management, question your assumptions, test with low risk and go find some 20%+ returns. It's your money, it's not going to make its self for free. Free and "guaranteed" will maintain the rate of inflation, IF YOU'RE LUCKY. If you tell yourself better returns aren't possible you're almost certainly going to prove your self right. If someone tells you that's a bad investment, maybe you should look there. "bad" probably means risky means profit potential.
But don't gamble, there are unknowns but there are also statistics and you can keep things in your favor if you keep an eye on things and following strict risk management rules. Don't invest in something because you "like" it. If you can't give a detailed reason for your investment with historical examples don't do it unless you want to loose money. If you have money to loose, hey gambling is fun.
This video is important enough that I have shared it on FB and Google+ (My only 2 forms of social media)
+Pidasian Hippie Thanks!
You are welcome!
Just found you through Madfientist. Figured you must be Dave Ramsey fans. Cool
HI there! At school today we had a substitute and his name was Mr.reed! He showed me your channel and said he was friends with you. So i wanted to tell you that mr.reed says hello! thanks
Tell Reed hi and hope you're doing well!
Ok I will! just woke up here in colorado but I will try to tell him if he is still there!
in love with your channel!!
great video in explaining time value of money. I'm wondering, how are the calculations , accounting for potential market crashes (like in 2001, 2009, and sort of 2015). markets are hard to predict, understandably. but considering these, a continuously compounded finance as with Ben wouldn't exponentially as in this video. I have no idea
While video is instructive two of the numbers or variables used in this lesson are unrealistic.
The assumed 12% annual rate of return to occur every year from age 19 to age 65 is simply ridiculous and unrealistic. An investor would be a fool to think he or she could achieve such a consistently high rate of return over time. No 19 year old potential "Bens" out there should reasonably expect to reach over $2 million after only investing $16k.
Arthur is only investing ($78,000 / 39 years =) $2,000 a year. That's chump change and not enough to max ($5,500) out his IRA.
Sure starting early is good but don't expect 12% and invest at least 10% of income, the more the better.
12% is chump change, i can easily make 36% a year with some day trades, the only reason people think that 12% is because they arent experienced to do anything but buy an index fund.
Showing this video to my 16 yr old cousin TO. NIGHT!
I got in the investing game a little late (I.m Arthur here)
+Brandon Driver Awesome!
Hey I liked the video 🙏🙏🙏
But what did you mean when you said you maxed out your IRA's monthly?
Im 18 years old and Iike would like to be a ''Ben'' how do i invest? where do i start?
Mutual fund company like Fidelity or Vanguard or discount brokerage. You want a broad based index fund to represent the majority or bulk of your investments. A S&P 500 Stock Market Index fund is a great start. Avoid fees such as annual account fees and transaction fees, LOADed mutual funds and high expense ratios.
PLEASE GIVE ME ADVICE ---
I'm 13, looking to educate myself financially during my teen years, and I live in England and is Compound Interest available here?
I think the reason they don't teach it directly is because it's quite obvious once you learn about interest and how banks work which you do learn in school.
you know what's even more weird
Why don't schools teach about incas?
I've often wondered about comparing a strategy of remaining fully invested at all times and investing all new cash immediately versus saving cash and buying even at minor market dips - let's say 5-10%. Is one strategy more successful? When a market crash does occur, buying a large amount of stock is most advantageous. As one of your previous videos mentioned, when you climbed to the top of the wooden tower, your investments made at the bottom of the market crash have more than doubled since. These are unusual times in that interest rates are very low and the only way of generating income is either increasing yield or increasing the stock/bond ratio.
+Shahrukh Bakar There are a lot of studies on this subject. www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work?stop=true This is a good one I like. In short, timing the market generally never works in your favor over the long term. Chances are you won't sell at the top(meaning you miss gains), and you won't buy at the very bottom(meaning you miss potential gains). The study shows if you can see into the future, you win the most, but the 2nd best is lump sum investing, and 3rd is dollar cost averaging. TBH, what I would do, is if I was over 30, I'd have 10% of my portfolio in bonds, and if the market crashed say 20% or more, I'd move that 10% to equities.
+Swirlstudios Thanks for the link. Interesting information there.
+Shahrukh Bakar I know...It's so tempting! Obviously since we're do for a market correction, we should hold off? But the research shows (I think vanguard did one too) we miss out on the bull markets when we wait on the bears. We're in that boat right now though.
Mike and Lauren Pretty much all big brokerages have done their own studies on this subject and came to the same conclusion. Shwab and Vanguard are the two most extensive studies(I linked the shwab one in my reply to Shahrukh). It is difficult to stay head strong when the data suggests something we view as illogical, and many people can't do it. However for you guys especially, trying to retire early, it is paramount you follow the data and not the emotion. As well as viewing market drops as an opportunity. The market goes down 50%? Do everything you can to get extra income to invest and make a huge profit over the following 5 years.
Dear Mike and Lauren, you need to do some due diligence by searching for the origin of this quotation about compound interest - even though the sentiment of the quote is true - you will find that it is not attributable to Albert Einstein!
12% LOL!! LMFAO!!
What is a good place to start investing with $200 a month?
I have been playing with stocks, high risk, high reward.
But to be "safe" i think TheLendingClub has been awesome! Super fun, and basically you can't loose money if you follow the most basic rules.
If you are on here, trying to learn, you will easly find the basic rules for the lendingclub!
Wait I'm confused, you don't get interest on a stock, right.... You only get interest in a savings account, but the interest in a savings account is super duper low!
Unless the stocks pay a dividend. For example, Armour REIT pays $0.19 per month and costs $25 at the time of this posting. If you put $5,000 into it, you'd have 200 shares. After a month, you'd get $38 in dividends, and you could buy 1 more share if the price hasn't changed too much. Next month you get $38.19 in dividends.
There's also a system called DRIP where you can have a company reinvest the dividends for you, often with a discount, and you can get fractional shares. If Armour has such a program, you would have gotten 1.52 shares.
I'm not suggesting Armour, I only used it as an example because it happens to have a nice round number (at this time) and pay monthly dividends.
I would stop listening to Dave Ramsey if he gave this example.
First, people increase contributions over time, 2k in 40 yrs is not the same as 2k today (e.g. it's worth 900). So instead if we increased our contributions at a flat 2% inflation scale every year or instead decreased the investment assumption by 2% we'd have a real term investment account.
Second, 12% is ridiculous. If you use a realistic 8% instead you get 462k and 516k instead.
And if you apply both a realistic return and a real return metric by using 6% plus assume contributions are not made beginning of each year but throughout the year you get 198k and 299k.
Compound interest is amazing but consistently investing and staying invested is the real solution not investing for a few years and assuming you'll return a similar % as Warren Buffett.
Where are these compound interest opportunities? This is great in theory but there is no sure way of getting anywhere near 12% compound interest on your investment.
+watafucup Mike said "aside from the 12% return...in that story." The point of his message was not that 12% was a realistic return goal, but that compound interest is what makes investing worth it. You don't have to earn 12% in order to take advantage of compound interest. Invest money in good index mutual funds and over the long term you will reap the benefits of compound interest. It's not magic and it's not a scam.
I said specifically the 12% return is what I don't agree with.
+Mike and Lauren That's fair enough, on second reading of my post I didn't want to seem so negative. I always enjoy watching your videos. I suppose I'd like to see a video of options on where to invest, I don't know if I trust vangaurd funds. I'd also like to know a good place to learn about this stuff because there is so much on the internet that is shady...
+watafucup No problem. A lot of the resources we would recommend are going to suggest low-fee index investing like us. We use 7% returns in our calculations. A good way to tell if you should trust an investing resource is if they are selling you something. I trust vanguard because it's everyone BUT vanguard recommending them. My stock broker who's going to be making a 5% commission? Not so much...
my returns aren't that high at 7%...
NO no no . This is wrong.
The example is completly different if you consider a more realistic grow 4-5%. Compound Interest is a great thing....but your example consider a 12% grow...
With the 12% Grow I could retire in 10 year at 38 age savings 2500$ month.
12% return assumption is absurd. DAVE Ramsay knows how to motivate people to eliminate debt but he doesn’t know squat about investing and financial modeling.
so can u teach me how to get 5% per month
Where does Ben invest his money?
In a low fee index fund. Either a "total stock market index fund" or an "S&P 500 index fund"
Another one of your videos helped me figure it out. You two are AWESOME! I'm making my way through all your videos, then I'm definitely subscribing!! You guys are super informative and inspirational!
should start with a Roth ira? I'm 21 years old.
Yes you should start investing. A Roth IRA is likely an excellent place to start. Look for low expense ratio Index funds like a Total US Stock Market Index fund or a S&P 500 Index fund as the foundation of your investing portfolio.
Bogleheads' Guide to Investing
The Four Pillars of Investing
12%? Sorry guys, it's just not going to happen. Not only is it not going to happen, but you also have to expect periods of ultra-low inflation rates. Or even negative interest rates (yes, it does happen.)
My advice is to invest in your skills and knowledge, and solid, non-depreciating assets. Or depreciating assets that multiply your working ability.
There's also the opportunity cost of sinking money in to "investments" that only return inflation (if that), and are subject to taxation and account-keeping fees anyway.
e.g. putting that money in to a mortgage, thereby reducing your total interest bill. Or a tradesman buying tools that will have a multiplier effect on income. etc.
What the hell? Is this what they teach is school? What are you investing in, CDs? Do you think the market is random? How many investment options do you think there are? If you're making less than 10% there's a problem. I'd be pissed with less than 12% and if you want to educate yourself a little bit and do some research and make your own investments 20% is a cake walk until you get to investing millions.
I think you guys are listening to bad investors you want to convince you that's the best they can do so they can take the rest of your money.
shadfurman You are not making 20% consistently over many years. You'd have to do heavy speculation for long term gains of that order, and that means high risk, and years of low or even negative returns.
w0mbles you might have a year here or there where you make less but some years you might make a lot more. I don't know what type of investing you have in mind, but 20% is not a ridiculous goal. In a mutual fund, sure, 10-12% is more reasonable.
shadfurman Could you name a mutual fund that has averaged 12% (after fees) over the last 10 years?
w0mbles that's exactly my point, idk why you guys don't get this. You don't leave money in one investment in perpetuity. When it's making good returns you put more money in when it's making less you move it to something that is. Would you keep a house you weren't living in that you couldn't rent at a profitable price?! I am starting to think you guys don't like money, or maybe you've just been indoctrinated to believe you can't make decent returns. If you want to trade a few dozen hours of work for millions in retirement that's up to you... Or you can decide 5% isn't acceptable and figure out how to fix it. And mutual funds are not the only possible investment, it's just safer because it's diversified, but that's no guarantee.
What are the odds of me averaging 12% on my investments in today's time, if say I invest in an IRA or 401k?
Can anyone answer?
+MarcheMellos Absolutely do not count on 12% return on your investments. That does happen, but it's rare enough that counting on it is foolhardy. A better estimate of stock market return (IRA or 401(k)) over a lengthy period of time might be 7%.
+MarcheMellos 12% is not likely. We use 7% in all of our plans.
+MarcheMellos 12% is not likely. We use 7% in all of our plans.
azliberalgeek Thank you so much for the answer!!
Mike and Lauren Thank you I'm 19 and I want to make sure I'm more like Ben than the other guy!! Love your videos love what you guys do?
🌙🌙🌙🌙🌙🌙🌙
Great video! I started getting into Dave Ramsay this year. I am unfortunately behind on my investments, but because I am becoming more frugal and minimal I am confident I can catch up! Thanks for the inspiration and keeping us focused!
-Frugalnev.com
They don't teach this in school because why would they want everyone to be rich? Lol