I had a fascinating discussion with someone this week, and I just had to share it with you…
A guy I know had worked in banking for over 30 years. He rose to the level of a branch manager, earning a six-figure income.
The bank offered a retirement plan that employees could contribute to before taxes. He did not remember the type of account it was, but it was paying around 8% at the time. The instrument did not require picking a stock or mutual fund. To this day, he couldn’t tell me what it was.
The bank went through a transition, and he was let go. At the time, he had a balance of $20,000 in the retirement plan. He was asked if he wanted to leave it invested, or take the cash. He chose to take the cash, and thought that he took all of it.
20 years pass by, and he starts to receive letters from his previous employer that he has money in his account.
He ignored these letters, thinking it had to be a mistake. He thought he’d withdrawn all of that money.
One day, tired of being harassed by the bank, he decided to pay one of their branches a visit. It turned out that he had withdrawn all the funds in the account except $100. And over the past 20 years, that $100 balance had grown to $5000!
He was shocked, and pretty much kicked himself all the way home. That was 50 times his money! If he had not touched a dime of the original investment, he would be sitting on $1,000,000 today!
What he told me is that he didn’t understand investments and how compound interest worked. Had he known, he said, he would have left the money alone.
Compound interest is very basic. I explain it in The Stock Market is For Everyone. For some reason, people have a hard time wrapping their mind around the concept.
Albert Einstein called compound interest the most powerful force in the universe. This is true – but you’ll only be able to make it work for you if you understand it!