Money: The hidden cost of things – the miracle of compound interest

 

“Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it.” – Albert Einstein


What if I told you that all price tags are a lie? What if I told you that the true cost of the item you are purchasing is up to 10x more than the cash you hand over for it? What if there was a hidden cost to everything you see around you? If you want to learn to see it, keep reading.

 

The following is a lesson in the true cost of things, as seen from an investor’s perspective. Once you read this, you will never see things the same way again. If you want to remain broke and keep wasting your hard-earned money on nonsense, click X in the top right hand of the browser and discontinue reading this article. It will be difficult to find out just how much you’ve wasted over the years, but better to find out now than keep on blowing tons of cash forever.

Imagine this scenario:

You walk into a store and you see a brand new widescreen TV. You see a crisp image of the big game, and your heart starts to beat a little faster. Your mind plays out how it would look sitting in your living room, how much you would enjoy watching the football on it, and how all your buddies would admire it. The price tag is $669, which you have in your account, so you buy the TV, leave the store, and feel the warm little buzz that comes with a new purchase.

But what many people haven’t thought about is the true cost of the TV in terms of lost income. Once you’ve developed an investor mentality, you begin to see things in terms of lost income over the long haul, rather than cost paid at the time of purchase.

Let’s say you’re a 30-year-old guy and you’ll live until you’re 80. You could have invested that same $669 safely in a blue chip stock, and returned an annual 5% in passive income. Again for the math wizards, 5% of $669 is $33.45. That doesn’t seem like a lot of money, but when you consider that it’s costing you that per year for the rest of your life (assuming you live to be 80) that means it cost you $1672.50 in passive income generated from stocks.

$1672.50 + $699 =$2371.50! Not such a good deal now, is it?

But that’s not even half the real cost. We need to see what happens when we factor in compound interest, which is the interest on the interest you would gain if you re-invested that same passive income earned. Let’s say you reinvest the income you’ve made from those stocks for just 30 years, so when you’re 60 you can retire in style. Remember, you’re only returning 5% in this example, in actual fact there’s a lot more to be had for those with the stomach for it.

The sum total of an original $669 returning 5% per year, when you re-invest those dividends over 30 years winds up being $5224.88! You just spent 5 grand+ on a TV you thought cost you $669! Now imagine you invested that 669 a month over the same period? How much would you have at 60? $562,931! If you don’t believe me, head over to Moneychimp and check for yourself.

Imagine how wealthy you could become if you stopped spending all your money on worthless nonsense and adopted the investors mentality. How rich could you be in 20, 30, 40 years? Are you willing to do the work needed to build true and lasting wealth? If you don’t believe in the power of compound interest, ask Warren Buffet, and he’ll settle any doubts.

Here’s a truth not to many bloggers will tell you: the idea of making easy passive income is absolute bullsh*t. They’re selling you a dream and making themselves rich in the process. Sure some do make money at it, but inevitably I guarantee they work very hard at it, and they offer something of true and lasting value to their readers.

The dream of easy, do nothing get rich is a big fat lie and always will be.


Do you want the true recipe for long-lasting wealth? Either A) Start a real company offering real goods and services and dedicate your life to it or B) Get a high paying job and invest in real companies producing real value, and keep investing the returns.

Before you know it you’ll have a nice little portfolio full of stocks mailing you checks every quarter, and if you’re smart enough to know about delayed gratification and re-invest, a hell of a lot of wealth awaits you down the road.

When it comes to money, slow and steady wins the race guys. Don’t let any chump tell you any different! It may not be so glamorous to see the reality of it, but I only deal in dollar bills and truth and I know for certain that the only place success comes before the work is in the Oxford dictionary.

Now you’ve seen the true cost of things, will you continue to squander your money as you have been? Or will you plant the seeds that grow the trees that return more seeds and eventually turn into a forest? As always, the choice is yours and your life is your own responsibility. I can only show you the path. It’s entirely on you to walk it.

Desire. Decide. Persist.

G-Freedom

4 Comments

  1. Great post G-Freedom!

    I recently read the book “Seeking Wisdom”, by Peter Bevelin. It has a lot of stuff from Charlie Munger and Warren Buffet. There's much about cognitive biases, investment, and accurate thinking. Great book.

    Speaking of compound interest, I got into stocks and savings when I was 16. And I was (still am) part of a stock club. We had a lecture from a guy called Gunnar Ek where he spoke about compound interest and other stuff. It was very enlightening when I was that age.

    Here's Gunnar, if you know Swedish:
    http://www.aktiebladet.se/index.php/special/112-gunnar-ek-om-aret-som-gatt-prognosen-foer-det-naestkommande-och-aktien-som-kan-dubblas

  2. Great post G-Freedom!

    I recently read the book “Seeking Wisdom”, by Peter Bevelin. It has a lot of stuff from Charlie Munger and Warren Buffet. There's much about cognitive biases, investment, and accurate thinking. Great book.

    Speaking of compound interest, I got into stocks and savings when I was 16. And I was (still am) part of a stock club. We had a lecture from a guy called Gunnar Ek where he spoke about compound interest and other stuff. It was very enlightening when I was that age.

    Here's Gunnar, if you know Swedish:
    http://www.aktiebladet.se/index.php/special/112-gunnar-ek-om-aret-som-gatt-prognosen-foer-det-naestkommande-och-aktien-som-kan-dubblas

  3. Thanks Ludvig! One of the things I asked myself when I started this blog is “what can I offer my reader?” I don't just want to blab my opinion, but actually offer useful advice that can solve problems. Much like you, I've been studying investment and stocks since I was 16 or so. Since it's something I know a fair bit about and it's something most people are interested in, I decided from the get go it's going to be one of the common features/topics here on this blog. Thanks for the feedback and I added “Seeking Wisdom” to my list.

  4. Thanks Ludvig! One of the things I asked myself when I started this blog is “what can I offer my reader?” I don't just want to blab my opinion, but actually offer useful advice that can solve problems. Much like you, I've been studying investment and stocks since I was 16 or so. Since it's something I know a fair bit about and it's something most people are interested in, I decided from the get go it's going to be one of the common features/topics here on this blog. Thanks for the feedback and I added “Seeking Wisdom” to my list.

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