I'm glad I had not eaten recently when I read these words of wisdom from President Obama:
“Save a little bit out of whatever you’re earning, and the magic of compound interest applies,” Obama said.
Just wow. Because the Fed is artificially sitting on short term rates (0 to 0.25%), the rate on my savings account at the Credit Union is 0.10%. Now that is a really magic number. If I saved $1,000 in that savings account, it would earn a cool $1 per year, or 8.3 cents a month.
But it gets better because I have to pay taxes on that $1. After paying state and federal income taxes, that leaves me about 75 cents at the end of the year for loaning the Credit Union $1,000. I don't know, 75 cents doesn't sound like such a great return.
But it gets better because of inflation. With headline CPI inflation running a little over 3% a year, by saving and using the magic of compound interest, I have lost about $29.25 a year in purchasing power.
I haven't done the math, but my guess is that the numbers don't get better after 10 years unless something truly magical happens.
See: Financial Repression
At today's 0.05% interest rate on 3-month treasury bills, you can watch your money grow 65% thanks to the magic of compound interest.
ReplyDelete(1 + (0.05 / 100))^1000 = 1.64851526
I'm assuming that rates don't fall any further over the next 1,000 years and that you can safely ignore taxes and inflation, lol. ;)
Mark,
ReplyDeleteHaha, 1,000 years and you don't even double your money. Nothing else is needed to know that things are still very badly broken.