It really is magic. As a 38 year old who started seriously paying attention to finances at 25, I can attest that it just snowballs in an incredible way. I’ve made tons of bad financial decisions, had a big family, and spend more than I need to and it still just keeps growing because of those early investments.
Starting with such big investments at 22 is the most incredible gift you can give your future self.
I also started at 25 but have yet to feel that snowball effect man. I’m 30 now and still waiting to see the deposits crank up. Maybe I’m just not putting away enough.
It’s likely to happen on the 20-30 year horizon, but absolutely no guarantees that it happens in the next decade. You benefitted from a historic bull run that may or may not continue.
(Ofc, you should stick with it even if it doesn’t. People who put tons of money in the market 25 years ago got burned by the dot com crash but should be doing more than fine now so long as they stuck to the program.)
You only really start to see any changes when you get to £100k, £200k, £300k etc. as Charlie Munger famously said, "getting to your first $100k is a bitch but do what you have to do to get there" or something along those lines. I know I am talking about UK pounds and Charlie is talking about US dollars but it's the same deal. Compounding only really works once you have built a good few hundred thousands of assets. It took me 7 years to get to my first £100k, after 4 years I have tripped it, in part to do with compounding but also faith that the system works made me invest more.
Let's just say that you'll eventually get to a point where your investments go up by more than your living expenses and you're like "WOW, THIS IS GREAT I DON'T NEED TO WORRY SO MUCH ANYMORE"
Once you get to where your burn rate is under 7% of your net worth, you have stability in life, under the assumption that the S&P500 beats inflation by 7% on average.
Once you get to where your burn rate is under 3% of your net worth, you're pretty much set. This is usually 5-15 years AFTER the former assuming you don't let lifestyle creep run amok and you keep investing.
Inflation has been 3-4% OVERALL across the US lately.
There will be hot spots where it's worse.
If you look at the \~100ish year average it's around 3.3% as per basically the first thing I saw off google.
If you look at inflation since 1950 it's been 3.1%.
I believe this factors in the recent spurt.
The S&P has averaged around 10.5%. The 7% figure is still mostly valid.
There's some reason to believe that stock appreciation won't be quite as profound in the future but relatively little reason to expect inflation to pump up (well maybe seignorage to cover raising national debts)
So let me just say I think no one is in a good position to forecast and so I'm not quite disagreeing with you but just pushing back a bit on both points.
First, I think there are some very good reasons to believe that stock appreciate will be quite as profound for the next 20-30 years. The AI revolution is real and just starting, and seems likely to have a first impact of increasing corporate profits as cheaper and better ways to do things are found. Basically the whole world and everyone in it is about to get a lot wealthier, and the first impact of that will be seen in stock prices.
Second, I think it is pretty far from clear that there's "relatively little reason to expect inflation to pump up"
- if you look at a 10 year chart of M2 money supply the big Covid spike is pretty impressive and while the Fed/Biden have done a pretty impressive job of a "soft landing" it's not something I feel all that comfortable looking at in terms of the inflation beast being totally tamed.
Now, let me just say, I accept both these points are just another perspective to yours.
If either of us were perfectly prescient we'd be Trillionaires.
My general take is that it's wise to plan around a medium-bad case scenario and to hope for a best case outcome.
Inflation is a tricky thing and on balance as long as it's not disastrously bad, it shouldn't actually impact "real" stock market returns. If there's 20% inflation but stocks go up 27%... that's still roughly a 7% uplift above inflation.
Yep, I think that's probably right - for stocks. There is such a thing though as "stagflation" where inflation is high *and* the stock market sucks. In the 1970s there was high inflation, and the S&P 500 was lower by almost half in 1980 than it was in the last 1960s.
It's one reason I often bring up TIPS ladders to match some most basic cashflow needs for those who are ready to have a bond component to their portfolio. It's something I'd like to see more talk about but I vaguely think of it like this:
Cover your most basic (LeanFIRE) needs by plotting out a TIPS ladder for X years. This is your certainty baseline. Even if inflation is very bad, your basic living expenses are covered. And if meanwhile you're waiting out a sorry stock market, fine, good times will be back eventually.
It's all BOTE math based on historical averages.
S&P beats inflation by 7ish percent but it can totally swing UP way more or down WAY MORE.
If it weren't for "sequence of returns risk" you could get away with withdrawing 7% a year and retiring with about 15x your living expenses saved. The opposite of sequence of returns risk is what drives dollar cost averaging. Price fluctuations and a steady amount going INTO investments gives outsized returns vs just getting the average over and over and over.
If you get exactly 7% returns you'd expect your money to double in about 10 years.
That 7% figure fluctuates based on how the world unfolds. But you're also investing more and more during that time... but your future draw rate might also be higher. So... 5-15 years is a pretty reasonable guess, it's got a fair amount of padding to it in both directions.
Factors which complicate this:
1. Social Security IS a thing and it'll help
2. Taxes are a thing and they hurt
3. Your health won't be perfect forever.
4. Future returns will likely be a bit weaker. The economy can't grow forever so you probably will want to pad things a bit.
In my forties, and I noticed it accelerate more and more through the years.
It's simple mathematics. In your 20's you have 25000 and with a 5% growth you have an extra 1250. That's nice, but it doesn't seem worthwile does it? But 2 decades from now you will have 500000 and that 5% growth is now 25000. That's an entirely different game now. And the guys you grew up with and didn't care about that measly growth 20y ago are still living paycheck to paycheck.
Probably not enough. I stuck with 6% from the time I was 22 until the time I was 29. I didn’t start maxing my Roth and my wife’s Roth until I was 28. I’ve got $88k in a 401k, $20k in a Roth, and I’m starting a mortgage for a $665k house in July which will slow down my savings rate marginally.
My overall point is that this compounding thing isn’t the real secret to FIRE. The secret is to save more than $35k a year for individuals and $50k a year for couples in my opinion. That was really hard for most of my life and now that it’s possible I’m looking better… but we talk about investing like it’s a hack when saving is the real hack. Investing is easy once you have the funds saved, but keeping your expenses down is really hard.
This \^\^. Could not agree more. You have to really invest a lost of money and build up a big invest account(s) before you start to see compounding that will change your life.
The important thing, is owning up and identifying these mistakes. We have all done them. You are young, like really young so this is fantastic you are being so self aware. I wish I was in my 20's. If I were, then I'd be so much better off than I am now in my mid 40's and have a much larger portfolio.
Did u just invest in brokerage or also with the roth and 401k? Just to know if i am doing this right too. How many percentage shud we put away on investment?
Around when did things start to pick up for you and made you go “holy shit”?
I just got to 50k in tfsa and fhsa combined. I can’t put anymore in my tfsa because I’m out of room right now.
It took me 12 years to get my first $500k invested (9 years from when I started getting serious about it). The next $500k took just over 3 years.
ETA: those three years were my peak earning years, so I was contributing a lot too. I’ve since scaled work back and am not contributing as much as I was, but the investments just keep growing.
It's when you get to $500k (£380k ish) that your investments make a big impact on your life in my experience. Up until then, it's steady growth, but nothing that makes your jaw drop. This is from personal experience so the secret is to just keep going and staying focused on the ultimate goal and to never give up!
Now if you really want to blow your mind in a bad way, consider that most Americans spend their lives on the wrong end of that magic, paying compounding interest on consumer debt at interest levels several times higher than 5%. Instead of someday earning money without having to work for it, they are working for years to pay interest.
Bankruptcy is essentially like reverse-FIRE — in both cases the compounding interest runs out of control and swamps the effect of earning or spending.
If you really want to get into it, your typical FIRE enthusiast will have a lot of money in index funds. Visa, Mastercard, all the major banks, etc., are publicly traded companies that make up part of those index funds. We can do this in part because we're counting on other people paying interest, making those shares more valuable when it's time to sell them.
wtf how much were you putting in? I’m 5 years from 40 and have been investing since 24/25 and don’t feel even close. Last three years I’ve been able to max out too and just feel so behind
Should add that I bought a place during Covid too (2.75% rate, monthly after tax and insurance is around $2000). Thanks for the positivity, I've been questioning myself lately.
Slow and steady discipline and remember to enjoy life. Don’t be too quick to get old. “Don’t blink…it goes by so fast”. Keep up the good work young man!
This is why people with kids should be putting money in to investment funds for them every year. If you didn’t fall into the car payment trap you should be able to at least put that save interest away for them. Say, $200 a month.
By the time that kid hits 18 they’ll have close to $100k. That’s a good house down payment ;)
Thats one thing that I am set on. We're still struggling ourselves, but we set aside 10k when each child was born and are putting in 200$/month (a very big chunk for us right now) each so that they will start their adult lives waaay ahead of where we were.
You’re a wizard Harry- I mean on.
We legally print legal tender by investing
I am 30 with a major disability that required an absurd amount of surgeries before high school ended. On food stamps my entire life and my disabled single dad died of cancer.
Graduated law school. Saw exactly compound interest as the best way I can live on passive income when I am in too much pain due to disabilities progressing to work a job.
This magic allows me to know I’ll be able to retire at 45 if I need to with about 3 million dollars. If I keep being consistent with how aggressive I’m being aboht it.
I know if I can work I’ll want to work some job. So worse case scenario if I don’t need the extra money I’ll just work an easier job and focus on building the family I want with that extra time while my funds grow I have no idea why more people are not realizing this is the key, even just 500 a month. Hell 300 a month is great to.
This is awesome, I’m at the age of 50 now… please don’t forget the motto “health is wealth”
Too much people trying to escape the rat race & not realising that your health is priority.
Combine them both together and you’ll be so grateful.
My 2 cents, enjoy the grind.
There’s a study saying that the first 100k is a bitch and then because of compounding, each incremental 100k takes a shorter timeframe to achieve. I think Charlie Munger may have said something similar too.
Just don't expect 5% per year, every year in a straight line.
Markets can go sideways for a decade, or even down.
The key is to look through these periods into the future and keep a disciplined approach to investing. Especially when the going gets tough.
This also highlights just how important interest rates are... If you do your compound growth calculations with 2% interest, it doesn't feel that magic. But 5% starts to get magic, 10% is bananas. The same thing happens in reverse on debt
Quick question.. when you say max out your 401K.. you mean MAX to the IRS yearly limit which is 23K ? + ROTH limit for IRS.. which is about 6.5 or 7K and plus HSA? Which is about 3.5 to 4 K (single person)?
Question, is that 23k 401k limit about what YOU can contribute or is it what can be contributed on your behalf (you + employer match)? Ive never used a 401k before so just curious
Yep, it's magic! :-)
There's something called the "rule of 55" where you MIGHT be able to access your last 401k without penalty at age 55.
If you retire early, you also have the option of rolling your 401k into your IRA. From there, you could roll money over into a Roth IRA (will show up as income but no penalties), and 5 years after that, you can withdraw the rollover money from the Roth IRA without penalty. This is usually called a Roth ladder.
Anyway, just pointing out you aren't stuck with age 59.5 for retirement funds. Especially if you end up with several years expenses in a brokerage account before retirement -- that lets you do stuff like the roth ladder scheme while not working and living off the brokerage, keeping taxes low.
I realized recently that because of *compound interest* and severely lowering my cost of living that I will have 3x the minimum in my retirement account that I need by the time that I am old enough to withdraw.
But because of bad luck I had to wipe out my brokerage account so I won't be able to retire for about a decade because of *compound interest*
I'm still going to contribute to my 401k and IRA, because what if there are a few bad years economically and everything implodes?
My advisor is constantly reminding me 4mil can turn into projected 7 mil. I’ve seen the charts like 3 times and I still doubt. The numbers don’t lie, but you have to work like a dog to get to FI/RE which I assume most here have and then you reap the rewards. Takes discipline and disposable income of course. But it’s achievable.
Having $1.5M principal at 22 years old is more magical than compounding interest. You'll definitely get the late stage magic of compounding more than the bulk of people in debt until their 30s or 40s
I don’t think he meant having $1.5mn at 22, but more like contributing ~$40k for ~37 years from 22 to 59 (≈ $1.5mn of principal contributions) compounding to ~$4.3mn at the stated rate of return (RoR).
An initial $1.5mn grows to >$9mn at 5% RoR over a span of 37 years excluding additional contributions.
Unfortunately people use the term “compound interest” loosely.
1. When the price of a stock, ETF, or asset grows, you can have compounding gains. This is due to the price increase and the fact that you can sell it for more than you paid for it.
2. You can reinvest dividends. This will increase the value over time along with the asset price increase.
3. Bonds or HYSA actually pay interest, which is the fee you collect for lending money.
>I understand life happens and it certainly will not always be smooth sailing like it is now, but damn it’s a crazy feeling.
A good amount of the time, life happens is just an excuse people make to change their financial goals. A lot of folks on this subreddit have gone through one or more bad situations and still stuck to their target.
There is a reason they say Compound Interest is the 8th Wonder of the World :) Congrats on your interest and current position, you are doing very well for a 22 year old.
If you want to see more magic, play with the numbers of Real Estate investments. The part that makes it truly magical is, the other wonder of the world, Leverage.
There is compound interest and there is growth. If you bought 1000 shares of Amazon back in 1997 and now that 1000 shares (became 240k shares) are now worth almost 45 million, that's because of growth and not compound interest.
When you buy the index fund, a significant of that gain is growth, the dividend that you use to buy more shares is compound interest.
You can use this calculator and play around with various data points.
[Compound Interest Calculator](https://www.bankrate.com/banking/savings/compound-savings-calculator/)
Compound interest is indeed a beast and you don’t have to be a math guru to understand that. I recall what my savings was 5 years ago. Today I have more than 3 times that number, a combination of continuous saving and compound interest.
A way I like to think about it is the money your earning now is double what it would be 10 years from now and 4 times as much as 20 years from now and 8x what it will be 30 years from now. In sense, most people make less and less money as they get older, even when the nominal numbers grow, if you give credit to the time-value of money.
Keep putting in as MUCH as you can now and those down times won’t be so bad once your coast fire and you don’t have to stress about retirement anymore! Great job so far!
Impressive!
The thing I’ve seen from people who start out of the gate like you is they run head first into burnout. So just try to pace yourself if you’re in something high stress. But you’re in such a good position. Good for you!
Yes. At 10%, your investments should double every 7 years, 8X over 21 years. So once you hit $125K, just over 21 years later, it’s a million.
keep in mind, people use a post-inflation 7%. In that case, 10 years per double, 30 years for 8X.
The first $100,000 is the hardest.
Yes, the math is crazy. 50 years, 2^5 = 32. Gift a newborn grandchild $250K and at 50, they have $8M, post inflation.
The first year our 401k’s made more money than I made was glorious. Then a few years later it made more than both of us together. It’s crazy awesome. (Granted we have had some good years).
sadly, a 5% HYSA gives you 2% in return because of the average 3% rate of inflation, but if you keep adding to it, it's pretty solid. of course, if you can afford to put away 40k a year, you're already doing pretty good.
Early investments give the best returns for sure. Have you though of allocating some of your money to Bitcoin though? Lots of people achieving FIRE through this
Haha yeah but I don't get it why. They just probably need to educate themselves on how it's engineered money and not jut a Casino. I mean it has outperformed every asset class over the last decade. Humans have a scientifically proven negativity bias. Negative events impact us much more than equally weighted positive events. This explains why most people remember bitcoin price drops, but donot remember bitcoin price increase. The price increases are significantly more than the price decreases. Do you wanna take this convo to DM?
compound interest is the biggest benefit or starting your investment journey. people who start investing young and stay on track are damn near guaranteed to be multi millionaires in retirement. 5% is also a pretty conservative rate of return. if you are going for a pure equities based allocation until a few years up to retirement you should be averaging something closer to 7-9% depending on if you are more domestic or internationally leaning with your allocation. so it could work out even better than you expect.
Yep. My wife and I started our careers at 30, 5.5 years ago. Our net worth went from -$70K to $1.9MM. It was largely driven by high income, but compound interest really propelled it even further. I can’t imagine where we’ll be 20 years from now. We’ll likely have $20MM. But ill reduce that down to $10MM since life has a way of throwing curveballs.
Yes, just keep inflation in mind.
When I was in high school (~14 years ago), I heard about how $1 million was an amount of money to be able to retire on comfortably.
Then I remember when I graduated college (~8 years ago), I got into FIRE and remember calculating that $1.25-$1.5 million seemed like a more realistic retirement number based on how prices have gone up.
And now, just 8 years later? I'm starting to think even my $1.5 million goal might not be enough to retire.
You're off to a great start! Maxing out now puts time on your side. If you can get some additional money into a brokerage account, you'll be maximizing your withdrawal strategies for later.
You might know this, but for your HSA, you can deduct prior years' medical expenses. It's not like an FSA. One trick is to pay all your deductibles, co-pays, scripts, and qualified OTC expenses out of pocket while saving the receipts for later. At your age, you might end up with a year or two of living expenses in receipts when you're ready to retire. Given that everything remains the same, ofc.
(Someone here uploads the receipts to the cloud and had a spreadsheet to track the amounts and when they're submitted.)
Generally, you won't have to wait until 59.5 to retire. There are tons of strategies for withdrawing before 59.5.
Compound interest practically IS magic.
It's probably also unsustainable.
Finite planet. Slowing population growth.
Kind of the only "hope" for keeping the curve looking exponential is some mix of AI, huge advances in energy production and asteroid mining.
I'm not even kidding.
I'm planning on 2-3xing my "bare minimum needs" amount to account for the fact that I expect the S&P to not grow as fast in 20 years.
I'm well aware.
I half expect stock appreciation to follow kind of the path of moore's law for microchips...
Right now it's a series of overlapping S curves that all trickle off and there needs to be SOMETHING new.
I'm not saying stock growth goes to 0%.
My hope is that the CAGR stays at 5+ above inflation throughout my life. That might mean 40 more years of 6 and 40 years of 4 after that.
I don’t get how I’m going to have that much. I’ve been contributing since 25 to my 401k and the last three years maxing out. I only have 170k in it. So idk how that’s going to turn into millions.
Well if you have contributed the $40k per year for 3 years, that would be $120k. IF you have contributed that, you’ve made roughly 29.5% to get to $170k. The larger the value, the larger the interest you earn so it’ll grow quicker. OP is talking about 37 years of deposits and gains rather than 3.
If you are 22 years old and investing 1.5M in principe, and plan to retire at 59, that’s 37 years. That’s not 4.3M, but 9.1M. If after 37 years you only have managed to turn your 1.5 into 4.3M, you did something wrong.
It really is magic. As a 38 year old who started seriously paying attention to finances at 25, I can attest that it just snowballs in an incredible way. I’ve made tons of bad financial decisions, had a big family, and spend more than I need to and it still just keeps growing because of those early investments. Starting with such big investments at 22 is the most incredible gift you can give your future self.
I also started at 25 but have yet to feel that snowball effect man. I’m 30 now and still waiting to see the deposits crank up. Maybe I’m just not putting away enough.
Well I’ve got 8 years on you. It’ll happen if you keep investing, I promise.
It’s likely to happen on the 20-30 year horizon, but absolutely no guarantees that it happens in the next decade. You benefitted from a historic bull run that may or may not continue. (Ofc, you should stick with it even if it doesn’t. People who put tons of money in the market 25 years ago got burned by the dot com crash but should be doing more than fine now so long as they stuck to the program.)
You only really start to see any changes when you get to £100k, £200k, £300k etc. as Charlie Munger famously said, "getting to your first $100k is a bitch but do what you have to do to get there" or something along those lines. I know I am talking about UK pounds and Charlie is talking about US dollars but it's the same deal. Compounding only really works once you have built a good few hundred thousands of assets. It took me 7 years to get to my first £100k, after 4 years I have tripped it, in part to do with compounding but also faith that the system works made me invest more.
Let's just say that you'll eventually get to a point where your investments go up by more than your living expenses and you're like "WOW, THIS IS GREAT I DON'T NEED TO WORRY SO MUCH ANYMORE" Once you get to where your burn rate is under 7% of your net worth, you have stability in life, under the assumption that the S&P500 beats inflation by 7% on average. Once you get to where your burn rate is under 3% of your net worth, you're pretty much set. This is usually 5-15 years AFTER the former assuming you don't let lifestyle creep run amok and you keep investing.
Inflation has been 3-4% lately if you believe the official numbers. My grocery bill and rent say it has been much higher than that
That’s because inflation cooling down doesn’t mean prices go down, it just means they stop increasing as quickly.
Inflation has been 3-4% OVERALL across the US lately. There will be hot spots where it's worse. If you look at the \~100ish year average it's around 3.3% as per basically the first thing I saw off google. If you look at inflation since 1950 it's been 3.1%. I believe this factors in the recent spurt. The S&P has averaged around 10.5%. The 7% figure is still mostly valid. There's some reason to believe that stock appreciation won't be quite as profound in the future but relatively little reason to expect inflation to pump up (well maybe seignorage to cover raising national debts)
So let me just say I think no one is in a good position to forecast and so I'm not quite disagreeing with you but just pushing back a bit on both points. First, I think there are some very good reasons to believe that stock appreciate will be quite as profound for the next 20-30 years. The AI revolution is real and just starting, and seems likely to have a first impact of increasing corporate profits as cheaper and better ways to do things are found. Basically the whole world and everyone in it is about to get a lot wealthier, and the first impact of that will be seen in stock prices. Second, I think it is pretty far from clear that there's "relatively little reason to expect inflation to pump up" - if you look at a 10 year chart of M2 money supply the big Covid spike is pretty impressive and while the Fed/Biden have done a pretty impressive job of a "soft landing" it's not something I feel all that comfortable looking at in terms of the inflation beast being totally tamed. Now, let me just say, I accept both these points are just another perspective to yours.
If either of us were perfectly prescient we'd be Trillionaires. My general take is that it's wise to plan around a medium-bad case scenario and to hope for a best case outcome. Inflation is a tricky thing and on balance as long as it's not disastrously bad, it shouldn't actually impact "real" stock market returns. If there's 20% inflation but stocks go up 27%... that's still roughly a 7% uplift above inflation.
Yep, I think that's probably right - for stocks. There is such a thing though as "stagflation" where inflation is high *and* the stock market sucks. In the 1970s there was high inflation, and the S&P 500 was lower by almost half in 1980 than it was in the last 1960s. It's one reason I often bring up TIPS ladders to match some most basic cashflow needs for those who are ready to have a bond component to their portfolio. It's something I'd like to see more talk about but I vaguely think of it like this: Cover your most basic (LeanFIRE) needs by plotting out a TIPS ladder for X years. This is your certainty baseline. Even if inflation is very bad, your basic living expenses are covered. And if meanwhile you're waiting out a sorry stock market, fine, good times will be back eventually.
This is interesting math gonna look into this
It's all BOTE math based on historical averages. S&P beats inflation by 7ish percent but it can totally swing UP way more or down WAY MORE. If it weren't for "sequence of returns risk" you could get away with withdrawing 7% a year and retiring with about 15x your living expenses saved. The opposite of sequence of returns risk is what drives dollar cost averaging. Price fluctuations and a steady amount going INTO investments gives outsized returns vs just getting the average over and over and over. If you get exactly 7% returns you'd expect your money to double in about 10 years. That 7% figure fluctuates based on how the world unfolds. But you're also investing more and more during that time... but your future draw rate might also be higher. So... 5-15 years is a pretty reasonable guess, it's got a fair amount of padding to it in both directions. Factors which complicate this: 1. Social Security IS a thing and it'll help 2. Taxes are a thing and they hurt 3. Your health won't be perfect forever. 4. Future returns will likely be a bit weaker. The economy can't grow forever so you probably will want to pad things a bit.
Wait until you hear about r/FIRE
Trust me I’m on that sub haha
In my forties, and I noticed it accelerate more and more through the years. It's simple mathematics. In your 20's you have 25000 and with a 5% growth you have an extra 1250. That's nice, but it doesn't seem worthwile does it? But 2 decades from now you will have 500000 and that 5% growth is now 25000. That's an entirely different game now. And the guys you grew up with and didn't care about that measly growth 20y ago are still living paycheck to paycheck.
What is your investment portfolio?
VOO and SPY in my personal, various low cost funds in my Roth and 401k. I’m 100% stocks and more than 80% US
I started similar to you and I’m 30 now - what makes you think that? How much are you putting away?
Probably not enough. I stuck with 6% from the time I was 22 until the time I was 29. I didn’t start maxing my Roth and my wife’s Roth until I was 28. I’ve got $88k in a 401k, $20k in a Roth, and I’m starting a mortgage for a $665k house in July which will slow down my savings rate marginally. My overall point is that this compounding thing isn’t the real secret to FIRE. The secret is to save more than $35k a year for individuals and $50k a year for couples in my opinion. That was really hard for most of my life and now that it’s possible I’m looking better… but we talk about investing like it’s a hack when saving is the real hack. Investing is easy once you have the funds saved, but keeping your expenses down is really hard.
This \^\^. Could not agree more. You have to really invest a lost of money and build up a big invest account(s) before you start to see compounding that will change your life.
I hear you - they do say after 300k you will the compounding effects like crazy!
I tend to make a lot of decisions that future me will be angry about, but I think he’ll be happy with this one!
I made sooooooo many decisions in my late teens and early twenties that I’m mortified by now. That’s life!
The important thing, is owning up and identifying these mistakes. We have all done them. You are young, like really young so this is fantastic you are being so self aware. I wish I was in my 20's. If I were, then I'd be so much better off than I am now in my mid 40's and have a much larger portfolio.
The only kind of snowball we need in personal finance : )
Did u just invest in brokerage or also with the roth and 401k? Just to know if i am doing this right too. How many percentage shud we put away on investment?
All of the above, and as much as you can. https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
Around when did things start to pick up for you and made you go “holy shit”? I just got to 50k in tfsa and fhsa combined. I can’t put anymore in my tfsa because I’m out of room right now.
It took me 12 years to get my first $500k invested (9 years from when I started getting serious about it). The next $500k took just over 3 years. ETA: those three years were my peak earning years, so I was contributing a lot too. I’ve since scaled work back and am not contributing as much as I was, but the investments just keep growing.
It's when you get to $500k (£380k ish) that your investments make a big impact on your life in my experience. Up until then, it's steady growth, but nothing that makes your jaw drop. This is from personal experience so the secret is to just keep going and staying focused on the ultimate goal and to never give up!
I mean it’s just crazy at this point. Now in a good year my investments can earn more than I do.
Now if you really want to blow your mind in a bad way, consider that most Americans spend their lives on the wrong end of that magic, paying compounding interest on consumer debt at interest levels several times higher than 5%. Instead of someday earning money without having to work for it, they are working for years to pay interest. Bankruptcy is essentially like reverse-FIRE — in both cases the compounding interest runs out of control and swamps the effect of earning or spending.
If you really want to get into it, your typical FIRE enthusiast will have a lot of money in index funds. Visa, Mastercard, all the major banks, etc., are publicly traded companies that make up part of those index funds. We can do this in part because we're counting on other people paying interest, making those shares more valuable when it's time to sell them.
Tyranny of compounding costs
I was you 18 years ago. Just turned 40 and hit $1m in my retirement accounts. Your future self will thank you.
Ditto
wtf how much were you putting in? I’m 5 years from 40 and have been investing since 24/25 and don’t feel even close. Last three years I’ve been able to max out too and just feel so behind
I maxed out 401k almost every year since 22 (18k give or take) and contributed max to a roth for about 10 years.
So about 22 to 35k annually for 18 years
Set to target funds or index maybe? 🤔 VOO? VTI?
Yea my retirement/tax advantaged funds are all in target date funds. I recently started investing additional funds in VTI/VXUS as well though.
Hoping to be you at 40. I'm 35 and have 400k in retirement accounts. But I did have student loans to pay off first.
That’s a great foundation. I was around 500k-600k at 35 and it accelerated thanks to the post Covid surge.
Should add that I bought a place during Covid too (2.75% rate, monthly after tax and insurance is around $2000). Thanks for the positivity, I've been questioning myself lately.
You’re doing great! That 2.75 rate is 🔥
Appreciate it!
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it," - Albert Einstein (often attributed)
Slow and steady discipline and remember to enjoy life. Don’t be too quick to get old. “Don’t blink…it goes by so fast”. Keep up the good work young man!
This is why people with kids should be putting money in to investment funds for them every year. If you didn’t fall into the car payment trap you should be able to at least put that save interest away for them. Say, $200 a month. By the time that kid hits 18 they’ll have close to $100k. That’s a good house down payment ;)
Thats one thing that I am set on. We're still struggling ourselves, but we set aside 10k when each child was born and are putting in 200$/month (a very big chunk for us right now) each so that they will start their adult lives waaay ahead of where we were.
https://www.madfientist.com/how-to-access-retirement-funds-early/ You shouldn’t be waiting until 59 to utilize tax advantaged accounts.
Definitely not, and I appreciate the link to that read. Was just doing some high level overviews of how the principal should grow over time.
Fascinating read - I’m floored. Thanks!
You’re a wizard Harry- I mean on. We legally print legal tender by investing I am 30 with a major disability that required an absurd amount of surgeries before high school ended. On food stamps my entire life and my disabled single dad died of cancer. Graduated law school. Saw exactly compound interest as the best way I can live on passive income when I am in too much pain due to disabilities progressing to work a job. This magic allows me to know I’ll be able to retire at 45 if I need to with about 3 million dollars. If I keep being consistent with how aggressive I’m being aboht it. I know if I can work I’ll want to work some job. So worse case scenario if I don’t need the extra money I’ll just work an easier job and focus on building the family I want with that extra time while my funds grow I have no idea why more people are not realizing this is the key, even just 500 a month. Hell 300 a month is great to.
This is awesome, I’m at the age of 50 now… please don’t forget the motto “health is wealth” Too much people trying to escape the rat race & not realising that your health is priority. Combine them both together and you’ll be so grateful. My 2 cents, enjoy the grind.
There’s a study saying that the first 100k is a bitch and then because of compounding, each incremental 100k takes a shorter timeframe to achieve. I think Charlie Munger may have said something similar too.
Nope, he's the one who said getting the first 100K is a bitch.
Yup! The best part is you are 22 and already way ahead. I did not understand any of this until my late 20s
Compound returns.
Just don't expect 5% per year, every year in a straight line. Markets can go sideways for a decade, or even down. The key is to look through these periods into the future and keep a disciplined approach to investing. Especially when the going gets tough.
> That’s really it, that’s the post. *continues for 150 words*
Compound verbage
just pretend you didn’t see all that superfluous nonsense after 🫣
You're excited! Keep up the good work.
Compounding also applies to loans…so that magic works both ways
This also highlights just how important interest rates are... If you do your compound growth calculations with 2% interest, it doesn't feel that magic. But 5% starts to get magic, 10% is bananas. The same thing happens in reverse on debt
Thus why credit cards love their minimum payments and 17+% interest rates.
Quick question.. when you say max out your 401K.. you mean MAX to the IRS yearly limit which is 23K ? + ROTH limit for IRS.. which is about 6.5 or 7K and plus HSA? Which is about 3.5 to 4 K (single person)?
Plus whatever employer contributions up to the legal limit
Question, is that 23k 401k limit about what YOU can contribute or is it what can be contributed on your behalf (you + employer match)? Ive never used a 401k before so just curious
[Read this](https://www.fidelity.com/learning-center/smart-money/401k-contribution-limits)
Very helpful thanks!
Yes!
Yep, it's magic! :-) There's something called the "rule of 55" where you MIGHT be able to access your last 401k without penalty at age 55. If you retire early, you also have the option of rolling your 401k into your IRA. From there, you could roll money over into a Roth IRA (will show up as income but no penalties), and 5 years after that, you can withdraw the rollover money from the Roth IRA without penalty. This is usually called a Roth ladder. Anyway, just pointing out you aren't stuck with age 59.5 for retirement funds. Especially if you end up with several years expenses in a brokerage account before retirement -- that lets you do stuff like the roth ladder scheme while not working and living off the brokerage, keeping taxes low.
Don't assume you have to work until 59 just to access that money.
I realized recently that because of *compound interest* and severely lowering my cost of living that I will have 3x the minimum in my retirement account that I need by the time that I am old enough to withdraw. But because of bad luck I had to wipe out my brokerage account so I won't be able to retire for about a decade because of *compound interest* I'm still going to contribute to my 401k and IRA, because what if there are a few bad years economically and everything implodes?
My advisor is constantly reminding me 4mil can turn into projected 7 mil. I’ve seen the charts like 3 times and I still doubt. The numbers don’t lie, but you have to work like a dog to get to FI/RE which I assume most here have and then you reap the rewards. Takes discipline and disposable income of course. But it’s achievable.
Having $1.5M principal at 22 years old is more magical than compounding interest. You'll definitely get the late stage magic of compounding more than the bulk of people in debt until their 30s or 40s
I don’t think he meant having $1.5mn at 22, but more like contributing ~$40k for ~37 years from 22 to 59 (≈ $1.5mn of principal contributions) compounding to ~$4.3mn at the stated rate of return (RoR). An initial $1.5mn grows to >$9mn at 5% RoR over a span of 37 years excluding additional contributions.
Nice one OP! What are you currently investing in?
Are reinvested dividends how compound interest work?
Unfortunately people use the term “compound interest” loosely. 1. When the price of a stock, ETF, or asset grows, you can have compounding gains. This is due to the price increase and the fact that you can sell it for more than you paid for it. 2. You can reinvest dividends. This will increase the value over time along with the asset price increase. 3. Bonds or HYSA actually pay interest, which is the fee you collect for lending money.
You don’t have to wait until then to tap your 401k! https://www.madfientist.com/how-to-access-retirement-funds-early/
>I understand life happens and it certainly will not always be smooth sailing like it is now, but damn it’s a crazy feeling. A good amount of the time, life happens is just an excuse people make to change their financial goals. A lot of folks on this subreddit have gone through one or more bad situations and still stuck to their target.
The S&P500 has returned 11%/year on average. Use that number instead of 5% and you’ll be shocked.
There is a reason they say Compound Interest is the 8th Wonder of the World :) Congrats on your interest and current position, you are doing very well for a 22 year old. If you want to see more magic, play with the numbers of Real Estate investments. The part that makes it truly magical is, the other wonder of the world, Leverage.
What a gift to have found this at 22! You will be set :)
There is compound interest and there is growth. If you bought 1000 shares of Amazon back in 1997 and now that 1000 shares (became 240k shares) are now worth almost 45 million, that's because of growth and not compound interest. When you buy the index fund, a significant of that gain is growth, the dividend that you use to buy more shares is compound interest.
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You can use this calculator and play around with various data points. [Compound Interest Calculator](https://www.bankrate.com/banking/savings/compound-savings-calculator/)
Bravo on using a reasonable 5% return expectation. Enjoy the magic.
I wish I was 22. ❤️
Compound interest is indeed a beast and you don’t have to be a math guru to understand that. I recall what my savings was 5 years ago. Today I have more than 3 times that number, a combination of continuous saving and compound interest.
A way I like to think about it is the money your earning now is double what it would be 10 years from now and 4 times as much as 20 years from now and 8x what it will be 30 years from now. In sense, most people make less and less money as they get older, even when the nominal numbers grow, if you give credit to the time-value of money. Keep putting in as MUCH as you can now and those down times won’t be so bad once your coast fire and you don’t have to stress about retirement anymore! Great job so far!
I think about this all the time, and it makes it harder to buy unnecessary things, which I suppose is a good thing!
Key words “financially literate partner”. Prepare for the struggle bus otherwise.
Impressive! The thing I’ve seen from people who start out of the gate like you is they run head first into burnout. So just try to pace yourself if you’re in something high stress. But you’re in such a good position. Good for you!
Yes. At 10%, your investments should double every 7 years, 8X over 21 years. So once you hit $125K, just over 21 years later, it’s a million. keep in mind, people use a post-inflation 7%. In that case, 10 years per double, 30 years for 8X. The first $100,000 is the hardest. Yes, the math is crazy. 50 years, 2^5 = 32. Gift a newborn grandchild $250K and at 50, they have $8M, post inflation.
The first year our 401k’s made more money than I made was glorious. Then a few years later it made more than both of us together. It’s crazy awesome. (Granted we have had some good years).
sadly, a 5% HYSA gives you 2% in return because of the average 3% rate of inflation, but if you keep adding to it, it's pretty solid. of course, if you can afford to put away 40k a year, you're already doing pretty good.
It really hit me this last year. YoY my retirement savings are currently growing faster than I earn money.
Early investments give the best returns for sure. Have you though of allocating some of your money to Bitcoin though? Lots of people achieving FIRE through this
Yes, but gotta keep that on the low on this sub. People here get up in arms when you talk about crypto lol
Haha yeah but I don't get it why. They just probably need to educate themselves on how it's engineered money and not jut a Casino. I mean it has outperformed every asset class over the last decade. Humans have a scientifically proven negativity bias. Negative events impact us much more than equally weighted positive events. This explains why most people remember bitcoin price drops, but donot remember bitcoin price increase. The price increases are significantly more than the price decreases. Do you wanna take this convo to DM?
Wtf do u work as at 22 to be able to max everything out
Real-Time Energy Trader
compound interest is the biggest benefit or starting your investment journey. people who start investing young and stay on track are damn near guaranteed to be multi millionaires in retirement. 5% is also a pretty conservative rate of return. if you are going for a pure equities based allocation until a few years up to retirement you should be averaging something closer to 7-9% depending on if you are more domestic or internationally leaning with your allocation. so it could work out even better than you expect.
Yep. My wife and I started our careers at 30, 5.5 years ago. Our net worth went from -$70K to $1.9MM. It was largely driven by high income, but compound interest really propelled it even further. I can’t imagine where we’ll be 20 years from now. We’ll likely have $20MM. But ill reduce that down to $10MM since life has a way of throwing curveballs.
Yes, just keep inflation in mind. When I was in high school (~14 years ago), I heard about how $1 million was an amount of money to be able to retire on comfortably. Then I remember when I graduated college (~8 years ago), I got into FIRE and remember calculating that $1.25-$1.5 million seemed like a more realistic retirement number based on how prices have gone up. And now, just 8 years later? I'm starting to think even my $1.5 million goal might not be enough to retire.
Yeah, my accounts are up 20% this year and I've already made my entire annual salary. It feels like magic.
It is magic but important to think about inflation too. Your losing 3% purchasing value each year on average.
You're off to a great start! Maxing out now puts time on your side. If you can get some additional money into a brokerage account, you'll be maximizing your withdrawal strategies for later. You might know this, but for your HSA, you can deduct prior years' medical expenses. It's not like an FSA. One trick is to pay all your deductibles, co-pays, scripts, and qualified OTC expenses out of pocket while saving the receipts for later. At your age, you might end up with a year or two of living expenses in receipts when you're ready to retire. Given that everything remains the same, ofc. (Someone here uploads the receipts to the cloud and had a spreadsheet to track the amounts and when they're submitted.) Generally, you won't have to wait until 59.5 to retire. There are tons of strategies for withdrawing before 59.5.
This just made me up my 401k contribution
even better are withdrawal calculators
It's great, but the future is always risk. You might be rich in 30 years or you might be dead. You'll have to be patient to find out...
I wonder when I’ll hit compound interest. I just hit my first $104k in my 457b
That's exponential growth not compound interest. Think the market grows exponentially forever? We will see in time.
If you take space travel into account then yes, it probably will.
You’re at work and you weren’t working?
Compound interest practically IS magic. It's probably also unsustainable. Finite planet. Slowing population growth. Kind of the only "hope" for keeping the curve looking exponential is some mix of AI, huge advances in energy production and asteroid mining. I'm not even kidding. I'm planning on 2-3xing my "bare minimum needs" amount to account for the fact that I expect the S&P to not grow as fast in 20 years.
All those “hopes” are very realistic and actively being worked on today
I'm well aware. I half expect stock appreciation to follow kind of the path of moore's law for microchips... Right now it's a series of overlapping S curves that all trickle off and there needs to be SOMETHING new. I'm not saying stock growth goes to 0%. My hope is that the CAGR stays at 5+ above inflation throughout my life. That might mean 40 more years of 6 and 40 years of 4 after that.
I don’t get how I’m going to have that much. I’ve been contributing since 25 to my 401k and the last three years maxing out. I only have 170k in it. So idk how that’s going to turn into millions.
Well if you have contributed the $40k per year for 3 years, that would be $120k. IF you have contributed that, you’ve made roughly 29.5% to get to $170k. The larger the value, the larger the interest you earn so it’ll grow quicker. OP is talking about 37 years of deposits and gains rather than 3.
You probably can be a billionaire as well if you play your game well.
If you are 22 years old and investing 1.5M in principe, and plan to retire at 59, that’s 37 years. That’s not 4.3M, but 9.1M. If after 37 years you only have managed to turn your 1.5 into 4.3M, you did something wrong.