The End Matters Most: Compound Interest at Its Finest

By Dr. Jim Dahle, WCI Founder

Compound interest was once called “the eighth wonder of the world,” and a critical part of the financial training I give my children is convincing them that they'd rather earn interest than pay it. However, I've been impressed lately with the importance of getting to the end of any time period when it comes to compound interest. Let me explain.

Compound Interest in Retirement Portfolios

Consider someone who invests money for retirement over 40 years. Let's say they start out investing $50,000 per year and increase that amount by 3% per year. Let's also say they earn 8% on this money. How much of the end (40-year) wealth amount do they have after 10, 20, 30, and even 35 years? Let's run the numbers.

After 1/4 of the time of that 40-year period, you only have 4% of the end amount. After 1/2 the time, you only have 16% of the end amount. After 3/4 of the time, you only have 41% of the end amount. Even stopping just five years earlier reduces the nest egg by 1/3—by more than $6 million! The effect is even more dramatic at higher rates of return (or higher rates of inflation). The lesson here is obvious: you don't want to miss the last few years. This applies to all kinds of life situations.

1. You want to start saving as early as you can. Those years at the beginning are really additional years at the end—at least for those dollars initially invested.
2. Working a few more years can make a huge difference in the size of your nest egg.
3. If you actually increase your retirement savings with inflation, you'll be saving three times as much in nominal terms after four decades. This is important to do. If you only saved $50,000 (nominal) per year, you would end up with just under $13 million, 30% less.
4. As time goes on, the additional contributions matter less. For example, if you stopped contributing after 35 years and just “let it ride,” you would still end up with $17.67 million, only 5% less. The savings rate matters most in the beginning; the rate of return (and compound interest) matters most in the end.

More information here:

4 Ways to Maximize Compound Interest

Compound Interest in Business

This principle of “the last decade matters most” doesn't just apply to finances. Consider the value The White Coat Investor has provided for doctors. People who have been around here a long time know that I was pretty burned out on doing the “WCI Thing” back in 2019. We were already financially independent, and WCI was consuming our lives. We had a serious decision to make. We could either do less than we were then doing and reclaim our lives, or we could hire (a lot of) help and do more. WCI had to either get bigger or smaller. We decided to go the bigger route. Now, instead of five part-timers, we have 17 people working here (11 full-time). So, that's fun. But imagine we had just packed it in back in 2019. How many fewer doctors would have been helped? What percentage of WCIers found WCI AFTER 2019?

At a minimum, about 30,000 doctors a year come out of medical school. That's 150,000 potential people who had no chance at all to be helped. We've sent out something like 100,000 copies of The White Coat Investor's Guide for Students over the last few years. Surely not everyone read the book, but even if only half of them learned something from it, that's 50,000 people who would not have been helped. Sixty people have received a WCI scholarship over that time. Dozens of our advertising partners have expanded or built their businesses off of our referrals over that time. We don't keep careful track of who was in the WCI community in 2019 vs. today, but I think it would be fair to say that at least 1/2 (maybe 3/4) of our community wasn't here in 2019.

Other businesses are similar. Most of the compound interest comes at the end. It might take a decade to become an “overnight success.”

Compounding Interest in Relationships

As time goes on, your personal relationships tend to get better and better, deeper and deeper. The last years matter more than the first few.

More information here:

When Interest Rates Matter and When They Don’t

Restoring the Balance Between Savers and Borrowers

Compounding Interest in Kids

Teaching your kids—whether it is about life, finances, or faith—compounds. Most of what you can teach your kids about life happens in those last few years before they leave home, even when it seems they aren't watching or paying attention.

Compound interest can apply to everything in life. Don't quit early and stop that compounding effect!

What do you think? What have you learned about compound interest over the years? Has it applied to your business or relationships? In what way?

The post The End Matters Most: Compound Interest at Its Finest appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.