The Mass & Energy Metaphor
by Jonathan Taylor
Just three letters and a number. Enigmatic and disregarded by most people, these simple figures transformed Physics nearly 115 years ago. This is Albert Einstein’s formula for the relationship between mass and energy, the Theory of Human Relativity. At a glance, it’s not a tricky concept, yet it becomes quite complex when you try to understand and apply it. The same goes with most things in our adult life.
I would like to relate this E = mc2 metaphor to personal savings. Mass and energy are a great way to explain savings and compound interest. The greater the mass of an object, the greater its potential for energy. Likewise, the more savings you have the greater the impact of compound interest. A brief overview of compound interest:
Compound interest means at certain intervals of time (every day, month, or year) a calculation is made to your original investment by the stated interest rate. This new value is now added to the original investment, and that sum will then be part of the next interest calculation. When your savings earns interest or a dividend and is reinvested, that interest or dividend starts generating interest or dividends. It is simply the math of large numbers; think of it as the proverbial snowball rolling downhill and gathering more snow.
Compound interest is essentially paying interest on interest. The challenge most people have, however, is believing they can achieve savings that will be significant in their lifetime. The answer is yes, you can. Compound interest will work for you, but you must start now, or as early as you can.
Even if you feel it is too small to amount to anything, do something. Begin with a decision to save x amount of dollars each month. If you can put that money away and not touch it for a year, you are practicing the discipline required to meet future financial needs.
Here is a hypothetical example of the power of time in creating financial “mass”:
If a 15-year-old invests $2,000.00 a year for just 5 years, then makes no more contributions, they would have close to $1,000,000.00 at retirement age. This is assuming a 10% annualized return. Compare this to someone who begins investing at age 30 and puts the same annual $2,000.00 away for the next 35 years. They will have $596,254.00 at retirement age. This is the power of compound interest – it is time that will grow your number.
If you’re above age 30, don’t feel like it’s too late to start. You can still achieve a large number. As illustrated in the above examples, a 30-year-old should not be disappointed by turning $70,000.00 into over half a Million!
As you continue to save, the amount available for interest to work on will grow exponentially. In the beginning when you look at your savings it will seem minimal at best. At first your account growth will seem minimal, but after 12 to 15 years you’ll see clearly the impact compounding has made.
Mass equals dollars. Energy equals time. Compounding interest is powerful, but it is a function of time. Deciding to save some dollars now will give you more control over how you spend your time later. Make that decision today and see how it can transform your future.