Think about things like your education, your professional skills, your interests and hobbies, your health, your friendship and (professional) social network, hell, even your kids. Whatever little you put into any of these today will compound over time.
If I set some time apart today to better learn a programming language (or a text editor) I will be more productive with it over the next few years. If I develop a healthy exercise and nutrition regimen in my youth, I'll have less trouble maintaining that as I get older and a better starting point. If I try to go out and meet people then I'll have a large network of contacts to draw from if I'm ever looking for something specific in the future. If I've dabbled with a number of different hobbies in my youth then I'll have all these experiences which shape, and ultimately improve the outcomes that I have when tackling a problem today. And lastly kids: If I spend quality time with my kids in their very early formative years (reading, singing, talking) then by the time they enter school they will already have an above-average level of education and that difference will continue to compound for them in their life.
It's currently up 24% YTD.
TBH I don't think looking at the last hundred years is particularly valuable. Nobody invests over a hundred year timespan. Most importantly, look at a graph of interest rates over the past 40 years. There is a fundamental "new normal" of extremely low rates (or, rather, negative rates for much of the world), making it extremely difficult to earn that 7% without taking on a very large amount of risk.
It may be true only for the people that have invested ALL their money as a lump sum right before the index crashed (at the worst possible time).
For anybody else, those that say invested in the previous few years into a passive index fund, and continued to invest in the next few years they would have broken even within two years then probably quadrupled their money by today.
Keeping the same amount in a bank would have turned it into 30% less - a decrease similar to what the "crash" would have caused.
People need to be taught not to be afraid of investing. I know many smart folks, some who are engineers, who were scared of investing until they were in their mid 30's. My dad taught me about investing when I was a teenager. You do this right, you can retire in your 40's or 50's, never have to work again if you don't want to.
You might luck out, maybe hit it rich on startup stock options by joining the next FAANG company. This is unlikely to happen. Investing in the stock market, week after week, year after year, decade after decade... It's almost guaranteed.
One of my biggest regrets, coming from a family/socioeconomic group where nobody invested, is not beginning to invest as soon as I had enough disposable income to safely do so (in my mid-20s) instead of in my mid-30s.
If you're 33 and working in IT, you should be holding stocks and hoarding that fantastic growth (and slowly, over time, scraping the gains off into bonds).
You bank savings are only guaranteed by FDIC to $300k. Chances are they are not giving you an interest rate that will keep up with inflation, either. At best it's not gaining value, and is in all likelihood losing value by tiny amounts as inflation eats away at it.
Keep in mind that costs for elderly care have gone nowhere but sky-high in the past decade or so. It's not crazy to plan on paying 10-25,000/month once you reach your 80s or 90s (or more if inflation rises).
Only these losses are permanent :-/ whereas the stock market recovered and quadrupled...
"What is the average annual return for the S&P 500? ... roughly 8%"
Of course, past performance is not necessarily indicative of future performance. But as a mental arithmetic trick, the rule of 72 generally works.
The fallacy here is that a human body is a machine with well-defined intake and output.
How would one even know what is "exactly" the right amount?
Over a year we consume 1 million calories. If one were just 0.1% off of systematically eating more (or less) than required then according to your model one would end up being 200 pounds fatter or 200 pounds leaner ... do you think that anyone can regulate up to 0.1% accuracy to what they actually need?
eating a little more or less has absolutely not discernible effect the body adapts to it.
So a 5% calorie deficit or surplus would have a fairly small effect during a single year, but over a decade or a lifetime the effect is huge.
I was always taught that the body uses up its glycogen stores before burning fat. But if that were true even a small calorie deficit would gradually use up our glycogen stores and we'd be walking around without any after that.
Plus before losing any fat you'd have to experience a glycogen crash/wall which most small deficit dieters don't experience.
Generally what fuel your body burns depends on the intensity of work you are doing, so if you're walking you may be burning 80%+ fat, but if you're running a 10k you may be 80% glycogen.
However, if you eat too many carbs at a meal (beyond what you need in the next few hours), your body needs to get that excess out of your bloodstream, so it will do a combination of: - fill your muscle/liver glycogen stores (limited size) - burn any excess carbs in preferences to stored fat - convert any excess carbs to stored fat
Once it's got rid of the excess carbs from your bloodstream, it will return to burning whatever the normal ratio of fat:carbs is for you.
Consequently, if you always eat too much carbs, you'll gradually pile on the fat, unless you're doing large amounts of training which depletes your muscle/liver glycogen, e.g: elite athletes.
It may not be possible to know or calculate the exact intake and output values, but those values are not needed. Your body gives you cues.
> eating a little more or less has absolutely not discernible effect the body adapts to it.
Yes, the body adapts to it by storing or eliminating fat (among other things).
> Yes, the body adapts to it by storing or eliminating fat (among other things).
No, it compensates by changing your metabolic rate mostly. You eat less, you will feel more lethargic, you eat more and you will fill (and be) more active
2 - 2.5 million calories a day is normal for people with a normal level of physical activity.
Fast-forward 20-ish years, and I’m still just as tall but I don’t have any problem finding pants that fit me. Sigh.
Continuous compounding is e^rt. Just subtract straight interest from this and you discover the maximum return of compounding over just collecting interest. Most compounding periods are much less than continuous.
I think this would take less than an hour. ;-)
The whole compound concept applies very well to startups though. 3% a week adds up.
[0] https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
The interest in it's simplest form is just a value appreciation of the time value of money [1]. Would you rather have $100 today, or $100 next month? How about $100 today vs $102 next month? Still rather in the today camp? How about $105 next month? That is the interest. It is the value derivative of having the money 'now' vs having the money 'later'.
Where things can get scammy is in the complex type of credit products on offer (tying in all sorts of opaque references to things presented as neutral which are far from), and how things are communicated to the borrower.
Tip: If you are considering a loan, always ask for a full repayment plan showing you which payments are due each month, and the resulting reduction in the amount due (your payment first covers the interest accrued in that month, and only after that covers principal reduction). If there are variables in the loans formula, ask for simulations that cover the most likely evolution scenario, as well as the extremes. Every financial institution has such a payment plan calculator. Long ago I have written one which afaik is still in use today in a non-trivial financial services company.
[1] https://www.investopedia.com/terms/t/timevalueofmoney.asp
You shouldn't have to spend an hour learning how the bank are gnna screw you.
As stated above, money has a 'time value'. Getting $100 today has a different value to you than getting $100 somewhere in the future. So to know whether a deal is interesting, I do not just have to know how much I will be getting back in return for my investment, but when. Getting back $180 as a single lump sum payment in a year is different than getting 12 monthly payments of $15 each month for the next year, even though in both cases you will have payed me back $180 looking back.
The interest rate the bank quotes, in your example 2%, is the percentage amount by which your outstanding IOU to them will be increased at the end of the month, before you make your monthly payment.
Now this was an example of a simple fixed interest rate. In practice there are unlimited kinds of formulas that can have variable interest rates over time tied too other things, capped or uncapped, and even then that is just one of the things that goes into a payments plan. So unless you have nailed down all the other factors, comparing just interest percentage A with interest percentage B, typically in the final haggle, tells you little.
This is why I advice always looking at the series of monthly payments that you will have to make over the duration of the loan repayment, and compare these with the series of monthly payments due under a competing proposal.
Banks will screw you over in more ways than you can imagine, but quoting a compound interest rate as opposed to a total amount repaid at the end of contract (which btw is often much longer than the repayment period or even unlimited in time but that is another story) isn't where it is at.
If I take out a £100000 loan with an APR of 2% and pay it back in full at the end of the first year, then the total amount I pay back is £102000. Apart from any early repayment charges, the original total term is irrelevant.
When taking out such a large sum, over such a duration for buying your home, the total amount to repay is not the important aspect. It's not like taking out a loan to buy a car or a holiday. You don't have the option of choosing between buying now with a loan, or saving up for a few more months or years to buy without one.
Affordability of the regular repayments over the duration of the loan is the key thing.
There is absolutely no way I would take out a loan of that size with fixed interest in the way you describe. It would be far too expensive, and give the bank too much power.
I'm relying on the fact that I can make large overpayments in order to own my home outright halfway through the original term. That couldn't happen without an annual interest rate. In fact, the most logical thing to do in that situation is to stretch the loan out for as long as possible, so that inflation makes your repayments cheaper.
For a rough example -
Imagine you bought a house for £100K 5 years ago, the interest is such that over 20 years it will cost £150K total (e.g. 3.5% over 25 years).
You have probably paid about 30K, taking about £15K off the capital.
You sell the house for the same amount you bought it. With annual interest, you owe the bank £85K, you give them that, and use the spare 15K for your next home.
With a fixed price, you still owe the bank £120K. You give them the £100K you got from selling the house, and you somehow have to find £20K to pay them the rest.
The bank is giving you $X to buy the house. You’re paying off a piece of it each month (your mortgage payment). Part of that goes to the interest on the loan, the rest goes to principal. The interest each month is based upon on the remaining principal. That means your payment starts off being mostly interest and gradually becomes mostly paying off principal.
You could say, “But I can just save the full price and then buy the house with no interest!”. Sure you could. But you’re forgetting that you’re living in the house (or renting it out...) while you’re paying it off.
That's only one kind of mortgage though - for a while there were mortgages available in the UK where you only payed the interest on the principal but you also payed into a separate saving scheme with the idea that when the latter matured it would pay off the former.
No idea if these are still available, but for a while in the early 1990s you used to get a very hard sell on them - we had one for a five years or so. In reality they are a terrible idea as you are paying interest on a non-decreasing principal which is a shockingly bad idea and then there is the risk of the saving scheme performance as well.
Edit: Of course you got a hard sell on them as they were clearly a terrible idea from the borrowers perspective but were far more profitable than a normal mortgage for the lender.
That said, the interest is a great write off for a landlord, especially if they are personally the originator of the loan to their holding company.
Not just that, but definitely do the math on the monthly payments.
In my case (in Chicago), my minimum monthly mortgage payment was half the monthly rent I had been paying, for a significantly nicer and larger place. Just had to get past the down-payment hurdle.
If you paid $0 on principal your first year, the interest would be $100,000x0.05=$5000
Make it monthly: $5000/12=$416.67 rounded up to $417
On an amortization schedule, the fixed payment is calculated at $537, with $120 going to principal and $417 going to interest on your first payment. Exactly what you would expect to pay. The interest isn't front loaded, it's just the actual accrued interest of what you have borrowed.
When you pay the $120 in principal on your first payment, your debt reduces to $99,880. $99,880x0.05/12=$416 rounded. Therefore, your next payment, still at the fixed rate of $537 is now paying $121 in principal, and $416 in interest.
In short, when you have a large debt, you pay larger interest, when you have a smaller debt, you pay smaller interest. This isn't exploitation, just mathematics.
$536.82x12x30=$193,255.20 Total($193,255.20)-Principal($100,000)=TotalInterest($93,255.20) give or take a dollar.
And so according to your desire, you'd want them to say it is a 93% mortgage.
The reason they don't is that interest rates and compounding are typically done annually. You also have the ability to make extra payments sometimes, which can pay it down faster. The faster you pay the debt, the less interest you pay.
For instance, if you win the lotto, receive a life insurance payout, or inheritance, etc and pay off the loan within the first year, it's no longer a 93% mortgage but a 5% one.
To me, it makes more sense to say, you owe $100,000 your first year, or $98,398 your second year, and that you'll be paying 5% interest over that year.
But that depends entirely upon how long you take to repay it. If you pay the loan aggressively up front, you pay less; if you make minimum payments for as long as possible, you pay more.
Your point seems to be basically that because you can’t do the maths, the mortgage is misleading. That is maybe a fair argument in some cases with financial products. Investment banks are notorious for obscuring the true cost of deals with complicated maths. However this doesn’t seem like a case of that. If the interest rate is 5% APR and you are free to pay it off as fast or as slowly as you like within some bounds, for example, it is absolutely essential that you understand what a 5% rate means to know how the mortgage works.
edit: not to mention that 5% is already a contrived figure not representative of how the interest is actually applied, designed to make it easier for you to understand what you’re charged. Your interest is probably calculated monthly or daily, not yearly. They could present you a nice hypothetical yearly figure, or a nice just-as-hypothetical 93% three-year figure. What’s the difference? Neither of them are real. Your interest is charged monthly, so they’re equally fake and misleading.
If the initial loan was $400k on a $500k house, then yeah it sucks that I've payed you $1.1M, a clear overpayment, but I wont be sad because I'm coming out ahead by about $1.5M.
In reality, loans come with minimum payments, so you can't come out quite so far ahead. What this all means is if you can do something better with your money, (e.g. market tracker at 7% on a 3.5% loan), then just pay the minimum and do that better thing with the rest. If you can't (e.g. market tracker at 7% on an 8% loan), then pay it down as fast as you can, or don't take it in the first place unless there are other factors.
In the markets where the money did end up, like the stocks and bonds markets, inflation ran rampant with NASDAQ and S&P history shows.
And neither S&P nor NASDAQ had anything resembling rampant gains, BTW:
S&P: https://www.macrotrends.net/2526/sp-500-historical-annual-re...
NASDAQ: https://www.macrotrends.net/1320/nasdaq-historical-chart (you have to click on the "by year" tab).
In neither of these charts a person unaware of QE could identify a trend.
Inflation as in the rise in price of a basket of goods is generally used in reference to the consumer price index, but can also be used in reference to stocks, and baskets of those such as the indices.
If the prices of assets rise, that is appreciation. If stocks or houses appreciate, you can sell them and profit: Your purchasing power rises. If consumables experience inflation, you can not sell them for a profit: They are either immaterial, like services, or can rot, like food. This isn't pedantry, these are different concepts.
Compound interest is probably the most powerful "force" governing out lives.
It is crucial when borrowing money, especially for longer terms.
It is crucial when saving and investing.
It is crucial in self-development, where a tiny 5% improvement in some area of your life per year can mean that you are twice as good at something in 15 years.
It is important when evaluating any kinds of improvements in personal life or in business.
The trick is that the percentage never sounds like much. The number of years always sounds like a lot. Nonetheless, the years WILL pass whether you want them to or not, and what tiny life choices you make throughout have a huge impact on where you will be in the future.
Being aware of that does not take much. An hour of intense concentration should be enough to get this insight. Of course, this depends on your age and math background. However, I feel confident saying the above as this to the Hacker News audience, as the above requires nothing more than an imagination and the ability to add and multiply by decimals.