Why aren't we all getting rich from compound interest?
Just let your wealth compound over time and you'll be a millionaire, the advice goes. If this is true why aren't more people rich?UNDERSTAND, SHARE & PUSH BACK
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That's because what it takes is time, a resource we are all limited on. The only way to accelerate it is to have a head start like already being rich or having money seeded from family or have enough spare income early on to front load it for growth. Instead, most start with nothing, make the least when we're young, often not being able to even start saving and accruing interest until we're older, and when we make the most money is near our retirement when that money has the least amount of time to accrue interest before we start eating into it to live off of. If you front load it with a lot of money you could line just off interest alone.
No amount of time will make you wealthy through compound interest with the current economic system.
While your money does grow in a savings account, the rate of growth is lower than the economy or real value of the money.
Just think about what a million dollars could have bought you in the 80s vs 00s vs now.
Yes your interest does also need to outpace inflation. Not seen a savings account that pays interest of anything like that right now. Nothing low risk is keeping up with inflation.
That's the thing, interest rates are almost always less than inflation. The only reason they flip is because inflation needs to be brought down.
The reason for this is that the government/economic model is designed to encourage spending. Holding money is effectively lost "opportunity" so the real value of the dollar is always pushed down.
That’s the thing, interest rates are almost always less than inflation.
Savings account interest rates are almost always less than inflation, true! Even worse, interest earned on savings accounts are subject to taxation as income, so effectively your highest bracket of taxation (in the USA at least).
However, no one with even the smallest shred of knowledge of retirement savings will tell you to park your entire retirement budget in a savings account and expect any kind of healthy return. Savings accounts are VERY safe investments. The deposits (not interest) are backed the the federal government up to $250,000 per person (and per bank). For better returns you need more risk. The basic index funds in the stock market such as the S&P500 return an average of 7% per year over a long period of time. This means that some years will be in the toilet at negative returns, while others. Two years ago it was 24%! Even last year was 23%! All of this is also ignoring the massive benefit of saving for retirement in a 401k or IRA where you can skip or defer the taxation on retirement income achieving even higher effective returns.
S&P500 historical annual returns:
This mean that if you had $100 in a standard boring S&P500 index fund at the beginning of 2023, you'd have $124 at the end of 2023. At the end of 2024, having not invested another single penny, you would have had $152.52 at the end of 2024. A savings account with a 5% interest rate and that same $100 deposit would be $105 at the end of 2023 and $110.25 at the end of 2024. This small amount difference doesn't sound like much, but now imagine it was some 35 year old's retirement fund with $100,000. End of 2023 would have that value at $124,000 and the end of 2024 would be $152,520. So an extra $52k growth in just two years!!!.
My example above is compounding in only two years. Now look at all those green years and you can get an idea of the power of compound interest.
The reason for this is that the government/economic model is designed to encourage spending. Holding money is effectively lost “opportunity” so the real value of the dollar is always pushed down.
I know you're saying this like its a bad thing, but if you really want to see the bad thing, imagine the reverse of what you said is true. Imagine the government was pushing deflationary position! Imagine your dollar would be worth more tomorrow if you didn't spend it today. People would stop buying all but the absolute essentials. Why buy a car today for $30,000, when if you waited it would only be $20,000 next year. Suddenly cars sales drop to nearly non-existent. Auto workers would be put out of work in droves. That is just one example. It would ripple throughout the economy negatively.
Yeah, I was calling out savings accounts cause that's what I imagine most people are talking about when mentioning compound interest. The video is talking about the false promise of compound interest and I wanted to call out the real reason it doesn't work.
As for the standard 2-3% inflation the fed targets. I wasn't saying it was bad, just that it means that you loose value if your money isn't growing. I can't say I studied economic theory far enough to have a meaningful stance on if that's good or bad.
That’s because what it takes is time, a resource we are all limited on.
And patience, a quality most people lack.
There's not enough patience in the world to make compound interest work for someone who lacks the expendable income upfront
You're not wrong.
But there's also definitely not enough patience on the part of people who do either.
Systemic failures aren't character flaws.
Go knit that on a pillow, friend.
It's not an argument. It's a platitude.
It's a statement of fact, you're just butthurt because it's a fact that completely destroys your delusional bootstraps bullshit