Have Yourself A Merry Compound Interest
Every year in December, you can count on an avalanche of “holiday spending tips” listicles, all nagging you about the same ol’ shit: Don’t go over budget, hunt for those electric deals!! Trample a granny if you have to!! COUPONS!!!!!! Hand-make gifts, save all year, serve Everclear + Kool-Aid in martini glasses at your holiday party for swift and affordable inebriation of your party guests blah blah blah.
These are all excellent tactics that you should 100% utilize, but we all know these things by now, right??
Let’s use a new and different perspective to think about the money we spend during the holidays. I want you to see what it looks like if some of this money is invested, instead of shoved deep into the pockets of Hallmark/Apple/Target/the mall/the internet. Specifically, I want to show you how this money would look in the stock market, earning compound returns.
Spoiler: The lesson here is that EVEN SMALL AMOUNTS MAKE A DIFFERENCE! I know how hard it can be to believe, so I’m making some cold, hard calculations for you. I want the numbers to be clear and tangible (unlike the meaning of Christmas).
I will discuss the math behind the compound returns at the end of the post. For now, just think of it this way: any money invested earns more and more over time, at an increasing rate. The earlier you stash money away, and the more time you wait, the bigger and faster it will grow—like a snowball rolling downhill. There’s some real magic behind compound returns, which I’d argue is a far more impressive form of magic than whatever’s happening at Santa’s factories in China.
The key here? You have time on your side. Compound returns require time to really work, and that’s what you have! You have far less control over the other two variables: the rate of return and for lots of you, how much money you can invest. But you have time. In each of these examples below, if you waited ten years and only had thirty years to invest, instead of forty—say between the ages of 35 and 65—you would make only half as much. In 25% of the time, you lose over 50% of profit potential.*
These numbers are assuming an 8% rate of return over a forty-year period.* Think: I’m 25 now and know I will need retirement money when I’m 65. If I invest this teeny amount of money here or this small amount there, what will that look like when I’m retired? Will it even make a difference? Is it worth forgoing these sick-ass Hanukkah nail decals? You decide:
You could easily spend $5 in 100 different ways in December: Stocking stuffers, a card at The Paper Source, holiday scratch-its, 1/3rd of one fancy cocktail, a Maccabean Manicure for all your press-on latke needs (keeps the Torah at your fingertips!), the list goes on. If you put that $5 in the market—just once!—you could have over $100 in your 401k by the time you retire.
*If you waited ten years to invest this $5, only investing it for thirty years instead of forty, you’d have ~$50.
Okay, now we’re talkin’!! $20 or………$435!! That’s some real scratch!
The interwebs cannot provide me with a statistic on how much Americans spend on generic fuzzy purchases around the holidays. If you or your giftee already owns fuzzy slippers, fuzzy socks, fuzzy PJs, fuzzy-fucking-everything, reconsider.
$30 seems like such an innocent amount. It’s how much you spend for a couple boxes of ornaments, an on-the-go meal while you’re running errands, a white elephant gift, or a festive holiday “topper” (see photos above). And while the Randy-Cane the Menorah Fedora would both be glorious additions to any holiday wardrobe, having $650 would be pretty fucking radical too.
There is no shortage of terrible holiday sweaters you can buy during the holidays. Some are great—terrible in a good way, if not totally overpriced—but some of this rubbish turns my heart into a smoldering lump of coal. If I see someone wearing a sweater that says “If you jingle my bells, I’ll give you a white Christmas” (yes, that’s a splooge reference), “Welcome to the North Swole,” or features a stripper pole-dancing atop a dreidel, I will be filing a claim for exactly $1,086.23 in punitive damages.
I get it, we all need something sexy to wear to Santacon. $65 may seem a good deal (it’ll pay for itself in free drinks!!), but it’s actually not if you consider that 1. you’d have 1,400 freaking doll hairs if you just invested the damn money and 2. That cape is so tiny. It’s the tiniest cape ever! If I’m paying $65 for a cape, it better sweep the damn floor behind me. Literally. Dramatically.
I love to receive personalized cards from my friends, especially when they have new families. It’s just that between getting your kid into a special outfit for 25 minutes of use and printing and postage for your 400 friends, that shit gets expensive! If you invested the money you spent on personalized cards, you’d have two flights to Hawaii in your Golden Years. Mele Kalikimaka…..
A tree and the tree stand alone could cost you $100, and that’s not even taking into consideration the emotional cost of picking pine needles out of your rug for the next three months. Is $2,175 worth skipping the Christmas tree/Hanukkah bush this year?
THE $50 PRESENT. THE OL’ I-HAVE-NO-FRIGGIN-CLUE-WHAT-TO-GET-YOU $50 PRESENT.
I have purchased the exact same scarf and tie for my mom and dad for at least 14 of the Christmases I’ve been alive. And how many $50 Williams Sonoma peppermint barks and Santa’s Chimney-scented Yankee Candles are sold to desperate, last-minute gift-buyers every year?? What if you eliminated just 4 of these $50 gifts? ($200 total.) It’s periwinkle pashminas… or $4,300!
(For some extra holiday lolz, please read this: The Haters Guide to the Williams Sonoma Catalog by Drew Magary)
Spend 10 minutes in Target during the holidays, and you’re walking out with a $300 receipt, I guarantee it. Target has crafted itself into a veritable cathedral of seduction. I would suggest not going and instead, investing that $300, but I fear that I jeopardize my credibility as someone who understands the human condition. People (especially women, it’s true) love to love Target, so, I won’t go there. But…….one trip to Target to buy crap you won’t remember buying in two years…..or $6,500…..
Ladies. Over $20k. A Merry Compound Interest, indeed!!
The average person will spend almost $1,000 on Christmas gifts this year. That’s JUST gifts. That doesn’t include the decorations, the feast(s), the outfits, the social engagements, and so on. I’m not suggesting that you should not buy gifts for loved ones, but it is pretty wild to see what just one cash dump into the stock market can do with time. For most of us, $1,000 is a helluva lot of extra money to scrounge up and put towards a long-term plan. But we also seem to make that money available for Christmas.
What if, starting this year, you found an extra $20, $100, or even $1,000 during the holidays to put into the stock market, in a retirement account? (Just buy an S&P 500 or similar index fund in your 401k, IRA, or Roth IRA.) And did this every year? Or did this, instead of gifts, with your loved ones? This is no substitute for regimented monthly saving—and you have to pay off your credit cards first—but this is truly the ultimate gift you can give yourself and your family. Stop buying Christmas lawn ornaments now, and take your kids on a tour of Europe when you retire. Say no to the 11th pair of Old Navy fleece pajamas, and pay for your grandkids’ college. If you were to invest the extra $1,000 each year for 40 years, you would have:
JOY TO THE WORLD!! That’s almost $300,000, after having only invested $1,000 each year.
(Compare this to only saving—not investing—$1,000 a year for 40 years: you’d have $40,000.)
I’m not saying that it’s easy, I’m not telling you what you should and should not spend your money on (I’m not Jewish and I’m aching for that darling menorah headpiece). I just hope that these silly calculations make you think about trade-offs and convince you that small amounts can make a difference. I believe that everyone deserves a joyous holiday season, but I also believe that everyone deserves to live securely, now and in the future. I’m under no misconception that it’s a challenge to manage both.
For those of you that want to understand the math behind compound returns, read on.
As mentioned, compound returns are returns on your investment that are growing at an increasing rate. How does this happen? First, you earn a return on the money you invested, called the principal. Say, for example, you invest $1,000 and earn a 10% rate of return.
$1,000 x (.10) = $100
You made $100 in profit. If this was a stock, the value of your stock went from $1,000 to $1,100. That whole new amount—the $1,100— is reinvested. In the following year, let’s say you earn the exact same rate of return, 10%:
$1,100 x (.10) = $110
You made a larger profit even though you had the same rate of return! That’s because the original principal ($1,000) was invested, AND so was the previous year’s profit ($100.) What does the next year look like? Remember, you’re reinvesting all available money ($1,100 + $110).
$1,210 x (.10) = $121
See? Each year you not only make more money, but at an increasing rate. And you’re not doing anything different! You’re not adding more money in!! You’re just sitting back and lettin’ that shit ride.
These amounts are small so it’s hard to wrap your head around the true magic of compound returns, but play around with a compound interest calculator to see how impressive these numbers can get—especially when you explore time frames longer than 30 and 40 years. That’s when the slope of a compound return graph starts to get steep, and it’s also why people are always screaming at us and telling us that our young years are the most important for investing. We should listen.
*It’s important to point out that all of this is purely hypothetical. You’re not going to “land” on any of the exact numbers I provided, I guarantee it. While the stock market has averaged about 11% a year over time, we should expect less—that’s why I used an 8% return in my calculations—but even this might be generous. 8% is an average, but real stock market returns are variable, so timing is also a factor.
Also, if you make one wrong move—selling out during a crash (do not fucking do this, I will come to your house and I will yell)—then you’re not earning 8%. But if you add money to the stock market consistently over time, are never phased by a downturn (they will happen), and are PATIENT, you will not be disappointed.
YOU MUST INVEST AT YOUR OWN RISK, YO!! Before you do anything, learn about how the stock market works. Here are a few articles to get you started: