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Compound Interest, a la Shmoop. It's not how much you care about camp.

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Question: How do you become a billionaire?

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Answer: This guy... the richest man in America for a long time... said, "Live to be 300."

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If you save money for long enough, you get there.

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If you saved ten grand a year, you get to a billion in a billion divided by ten thousand

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years or... one hundred thousand years. That's a little beyond the current average

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life expectancy. So... there's gotta be another way. Yeah,

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Compound Interest.

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That is, you invest your money -- stock market, bonds, private equity, venture capital...

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whatever... and you make some kind of return.

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Put in a dollar today and get two dollars back in 5 years and you've made about 20%

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a year. So if you compound your interest, you start

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with a new amount each year.

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Let's see how that works in real life. Over the last hundred or so years, the stock

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market has compounded...

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... with dividends reinvested... and forgetting taxes at about 10% a year.

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Let's start with ten grand.

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You've mown a lot of lawns to get there -- and you invest it.

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After 1 year of compounded interest, it's worth $11,000.

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Yep, you made a thousand bucks doing... nothing. The coolest element in compound interest is

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that now you start out the year with eleven grand.

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And you get to... compound it. Blam. And after 1 more year, it's now $12,100

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Let's think about the same problem, but this time we'll use equations. Remember, we start

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with $10,000 and compound at 10% per year for 1 year.

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Note that, after the first year, you made exactly a grand.

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But now -- since you've started with a higher base of 11 grand instead of 10 grand...

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... you get to compound off of a higher number... and in year two you've made a hundred bucks

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more for the privilege. Taking a closer look, we can see that we're

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building a thing called the equation for Compound Interest.

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A is the ending amount, P is the starting amount, r is the interest rate, n is the number

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of times compounding happens per year, and t is the number of years your money is being

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compounded.

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For now, we'll assume compounding happens once a year, so n = 1.

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And the process continues.

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So let's say you did nothing but sit on your fat duff the rest of your life... other than

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save that 10 grand when you were 25...

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...thanks again for mentioning us in your will, Grampa Warbucks.

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Here's what that 10 grand looks like, compounded over an expected 60 remaining years of your

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life.

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Here we are at Year 8.

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We've seen our 10 grand blossom into over 21k.

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It's certainly moving in the right direction... in fact, we've more than doubled our initial

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investment...

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...but it's not quite enough to pack it all in and retire to the Caymans.

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Well, sheesh. It's been only a decade, and we're only sitting on twenty thousand dollars.

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Is this compound interest thing really all it's cracked up to be?

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Let's move on down the road...

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Year 15. We've doubled our money yet again. Nearly 42k, in the bank.

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Assuming that, by this point, we don't owe large sums of money to anyone who is threatening

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to break our legs... Year 22. Doubled again, to over 81,000.

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Year 29. Nearly 160k.

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Up and up we go...

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Until finally... check out Year 60. Over three million samolians.

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Which, sixty years from now, might be almost enough to fill up your gas tank.

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So, we start with $10,000 and compound at 10% per year for 60 years.

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Okay, sure... 60 years is a long time from now...

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...but think how nice it's going to be to have all those millions... just sitting there,

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waiting for you to get old and retire. And this example only demonstrates what happens

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if you invest $10,000 in your entire lifetime.

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If you start with a larger investment...

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...or contribute additional funds along the way...

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...it should be easy to see how one might quite conceivably become a billionaire, if

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they play their cards right. Speaking of gambling, your other option is

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to sit down at the roulette table, put your life savings on "black," and let it ride about

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20 or 30 times.

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Let us know how that goes.

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