The power of compounding interest
As a child of the 1970's, my dad loved to tell me about the power of compounding interest, how just a small amount of money, in an interest bearing account could grow into a million dollars in a lifetime.
I never quite bought his story of easy wealth. It is easier for me now, knowing about inflation, to see compounding works BOTH ways, up and down, and if your interest bearing account fails to match inflation, then you're compounding down, not up.
The mythic power of compounding is still alive and well, and the existence of pretax 401(k) plans for retirement depend on it, as well as the older fashioned pension plans. We all have to save for the future, for a time when we want to retire, or can't work, or just need a break from the rat race, right?
Well, I bought it, at least contribute to a 401(k) at the minimum level for maximum matching contributions, and I have a Roth IRA as well, at my credit union, and feel better about its 5.x% returns than the wild and woolly world of stocks and bonds, or anything that can LOSE not only against inflation, but against principle contributions as well. I'm NOT a gambler.
For the moment my "safe bet" is to put a maximum of extra contribution toward my home mortgage. The interest rate is nearly the same as my Roth, AND I can deduct the interest from my net income in computing my income taxes, so probably in a purely rational way, I'm doing the wrong thing. BUT I feel justified I'll be better off in the future when I don't have to pay a mortgage, and I can reduce the amount of money I am adding to an economy I don't believe in.
If its true that debt CREATES MONEY, then paying down my mortgage debt apparently is reducing the amount of money available in the world. I do wonder what a world would be like if everyone could avoid debt, work from previously earned assets.
I should mention that my mortgage is only for half a home, since I inherited a home when my mom died and I merely bought out her share, so she and her husband could buy a mobile home free of debt as well. Not a bad ending, especially if I can keep a room mate or two to help pay the bills.
I'm re-reading Daniel Quinn's book, "Beyond Civilization", talking about the idea that a "new tribalism" can replace civilization for those who don't fairly benefit from our hierarchical system of power and wealth, especially calling on young people to make their own way, maybe like they tried in the 1960's.
A part of me wishes EVERYONE could know the success and security I know, to consider having a paid-for home before the age of 40. Other times I get angry to see how easily others seem corrupted by false visions of easy wealth and affluence, neglecting the years of debt they must endure to escape their appetite. I'm old enough to know that in good times, work and rewards seem easy, and yet somehow burdens accumulate and rest fails to provide enough to make the next days burden's seem acceptable.
Okay, back to compounding, I'm SURE of the power of compounding. I just think there's MANY sorts of changes that compound, changes that done SOONER, become MORE than had we waited to do them later. AND other changes may be more powerful if done later rather than sooner. We can't know which, in a changing world. Perhaps we play with money and wealth as a guaranteed return for the future, but I totally don't trust this, at least outside of a few years of hoarding. Money is illusion, and it can be invested well, but whether it comes back isn't in our control. A nicer world is one where we invest in things that benefit more than ourselves and let the multiplers of helping others help them compound the gift to new highs. I mean we all already do this, but must remember this value, hidden behind desires for guarantees.
What will I do when my mortgage is paid? Could I find meaning in life outside of a high-income job, find a vocation that calls by something more than money? A good and scary dream. Meanwhile it is nice to have more money than I need.
I never quite bought his story of easy wealth. It is easier for me now, knowing about inflation, to see compounding works BOTH ways, up and down, and if your interest bearing account fails to match inflation, then you're compounding down, not up.
The mythic power of compounding is still alive and well, and the existence of pretax 401(k) plans for retirement depend on it, as well as the older fashioned pension plans. We all have to save for the future, for a time when we want to retire, or can't work, or just need a break from the rat race, right?
Well, I bought it, at least contribute to a 401(k) at the minimum level for maximum matching contributions, and I have a Roth IRA as well, at my credit union, and feel better about its 5.x% returns than the wild and woolly world of stocks and bonds, or anything that can LOSE not only against inflation, but against principle contributions as well. I'm NOT a gambler.
For the moment my "safe bet" is to put a maximum of extra contribution toward my home mortgage. The interest rate is nearly the same as my Roth, AND I can deduct the interest from my net income in computing my income taxes, so probably in a purely rational way, I'm doing the wrong thing. BUT I feel justified I'll be better off in the future when I don't have to pay a mortgage, and I can reduce the amount of money I am adding to an economy I don't believe in.
If its true that debt CREATES MONEY, then paying down my mortgage debt apparently is reducing the amount of money available in the world. I do wonder what a world would be like if everyone could avoid debt, work from previously earned assets.
I should mention that my mortgage is only for half a home, since I inherited a home when my mom died and I merely bought out her share, so she and her husband could buy a mobile home free of debt as well. Not a bad ending, especially if I can keep a room mate or two to help pay the bills.
I'm re-reading Daniel Quinn's book, "Beyond Civilization", talking about the idea that a "new tribalism" can replace civilization for those who don't fairly benefit from our hierarchical system of power and wealth, especially calling on young people to make their own way, maybe like they tried in the 1960's.
A part of me wishes EVERYONE could know the success and security I know, to consider having a paid-for home before the age of 40. Other times I get angry to see how easily others seem corrupted by false visions of easy wealth and affluence, neglecting the years of debt they must endure to escape their appetite. I'm old enough to know that in good times, work and rewards seem easy, and yet somehow burdens accumulate and rest fails to provide enough to make the next days burden's seem acceptable.
Okay, back to compounding, I'm SURE of the power of compounding. I just think there's MANY sorts of changes that compound, changes that done SOONER, become MORE than had we waited to do them later. AND other changes may be more powerful if done later rather than sooner. We can't know which, in a changing world. Perhaps we play with money and wealth as a guaranteed return for the future, but I totally don't trust this, at least outside of a few years of hoarding. Money is illusion, and it can be invested well, but whether it comes back isn't in our control. A nicer world is one where we invest in things that benefit more than ourselves and let the multiplers of helping others help them compound the gift to new highs. I mean we all already do this, but must remember this value, hidden behind desires for guarantees.
What will I do when my mortgage is paid? Could I find meaning in life outside of a high-income job, find a vocation that calls by something more than money? A good and scary dream. Meanwhile it is nice to have more money than I need.
posted by Ares Olympus at 10:46 AM
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