"Do you mean to tell me," said John Blake, somewhat skeptically, "that if I had begun investing $100 a month regularly fifteen years ago, I could for the next fifteen years draw out $45 each month and then have $58,090 left?
"Why, if I had invested $100 a month, or only $1,200 a year, for the past fifteen years, that would be a total of only $18,000.
Then $45 a month drawn out for the next fifteen years would be $8,100 taken back. That would leave only $9,900 of my earnings left in the investment. And you mean to tell me that in place of this $9,900 I could have $58,090! Seems incredible," concluded John.
"I mean to tell you," explained his friend, Ed Larkin, "that such a result mathematically possible. $100 monthly for fifteen years, at 6% interest compounded semi-annually, amounts to $29,045. That sum at 6% pays $1,742.70 annually or $145.23 monthly. This provides $100 a month to continue investing for a second period of fifteen years, and $45 a month extra which could be drawn out and spent.
"You can invest in good bonds that pay 6% or more. Most investment bankers will sell you bonds on monthly payments and allow interest on those payments. Then if, as soon as interest comes due on your bonds, you apply it toward the purchase of more bonds, your interest is immediately earning more interest. Thus you are getting the practical equivalent of compound interest.
"Of course, if you slip up now and then the final result would be affected. But this example nevertheless shows the surprising possibilities of systematic investment."
These quite amazing figures were brought to light during a serious little visit which two old friends were having one evening, when one sought to learn the other's secret of financial success.
John Blake and Ed Larkin had started their business careers at the same time and with similar opportunities. Both had earned good incomes, but after eighteen years John had nothing laid by while Ed was well fixed. John had asked Ed to dine with him so he could put some pointed questions to his well-to-do friend about the important business of getting ahead. After dinner they found a quiet corner and John opened up.
"Ed, when you and I were just starting out you will remember that it was my ambition to be earning $10,000 a year by the time I was thirty-five years old. Well, it so happened that I hit the $10,000-mark a few months before my thirty-fifth birthday. But it didn't mean anything as I had nothing to show for it. When I learned how well off you are and recalled how we started with equal opportunities, I realized that there was something radically wrong with my system. So I am asking you, as an old friend, to diagnose my trouble and prescribe a remedy."
"Well, John," started his friend, "your request may lead to some pretty personal comments, but I can stand it if you can. I know your trouble and I will be very glad to suggest how you may correct it."
"Shoot," said John, "I am at your mercy. I know your criticisms will be justified, and your suggestions will be sweet music to my ears.
"To begin with, John, you started your business life with the wrong point of view about earnings, as you yourself have suggested. Your aim was to earn a lot of money. But what for? Partly so you could have everything you wanted, and you wanted a lot. Partly so you could pile up a snug fortune. But there were always so many things you wanted to get with your money and saving a small sum regularly always seemed to you too slow a method of getting ahead. So you indulged in things you could just as well have done without and when there was a little money left you always lost it taking fliers.
"We all want to pile up money rapidly. But too many of us, in trying to make our money grow fast, choose methods which end up with serious losses. That's been part of your trouble to make up for free spending you have made hazardous investments, hoping for big gains, not realizing what substantial gains you could make safely.
Then Ed showed John a booklet of figures and tables which offered the surprising results mentioned at the beginning of this article. "I could have saved $100 a month for the past fifteen years," mused John, "but I didn't do it because, as you say, I thought it was too slow. I guess I forgot the compound interest lessons I learned in school."
"While we are on the subject," continued Ed, "I have some other figures here which show you what a great little worker interest is. This table shows what happens to a steady investment of $50 a month when 6% interest is allowed to do its work steadily."
The slip Ed took out of his pocket had the following figures on it:
$50 Saved Each Month
| |
Without Interest |
6% Simple Interest |
6% Semi-Annual Compound Interest |
| 5 years |
$3,000 |
6,000 |
9,000 |
| 1O years |
$3,457.50 |
7,815.00 |
13,702.50 |
| 15 years |
$3,499.50 |
8,202.00 |
14,522.50 |
6% simple interest shows a gain of $4,072.50 or 45% gain over the total amount saved in 15 years. 6% compound interest shows an additional gain of $1,450, a total gain of $5,522.50, or 61⅛% gain over the total amount saved.
"Now," resumed Ed, "both of these examples pertain to regular monthly investing of small sums. Let us see what happens when a single large sum is subjected to compound interest treatment. Here are some figures I took from compound interest tables.
$10,000 AT 6% SEMI-ANNUAL COMPOUND INTEREST
| At the end of |
$10,000 has grown to |
| 3 years |
$11,940 |
| 6 years |
14,257 |
| 9 years |
17,024 |
| 12 years |
20,327 |
| 15 years |
24,272 |
7% semi-annual compound interest shows a gain of $18,067 on $10,000 in fifteen years, or 180% gain on the original amount. The results are proportionately the same on any sum.
Remember that the original investment is not increased except by interest. See how the interest gain increases during each succeeding three-year period, how money increases its ability to grow with practice.
"These are just figures, but they show you what you can do with money if you are willing to save and invest it. You can get compound interest at 3½% or 4% through the savings bank, but there is no way for you to get perfect compound interest at 5%, 6%, 7% or 8% so as to make your money grow to the exact penny the way it figures out in the interest tables. But you can invest in sound bonds paying 5%, 6%, 7% or 8% and by reinvesting your interest coupons as they come due it is a simple matter to get the practical equivalent of perfect compound interest."
"That's it," concluded Ed. "The simple, sure device of compound interest will get for you what you want substantial, quick gains. And compound interest works well with sound bonds. It isn't necessary to take risks."
"Loan me that booklet, Ed. I want to write that investment company."
