The most powerful force in the universe is compound interest.Would you rather get $10,000 today or a penny which doubles in value every day for 30 days?
--- Albert Einstein
Phil Harriman, former senator for Maine, asked this question earlier today in Banff.
Most of us would take the $10,000 today but after 30 days, the penny would grow to an astounding $5.4 million. We have trouble estimating exponential growth.
What about the effect of tax on the investment growth? With a tax rate of 35% (US federal and state), the $5.4 million drops to a miniscule $20,300. We have trouble estimating the effect of tax.
Static examples are interesting, but what happens if the assumptions change? We can't easily estimate the outcome. Rather than guess, find out using the calculator I created with InstaCalc (a very nifty tool for bloggers and websites).
Avid readers with excellent memories may recall my earlier post on compounding, which gave more explanation of the calculations.