“These cloudy days, make you wanna cry …” — from “No More Cloudy Days,” as performed by The Eagles
Recently I walked through the living room and found my husband laughing at a vintage episode of "The Andy Griffith Show." Mayberry citizen Frank Myers is delinquent on his taxes. The mayor and city council demand that Andy serve an eviction notice, a service he reluctantly performs. Small town kindness, though, leads Andy, Aunt Bee and Opie to invite Frank to stay with them until he gets resettled.
While rifling through Frank's possessions Andy discovers a 100 year-old bond, purchased in 1861 from the town of Mayberry and bequeathed to Frank by his great-grandfather. The bond pays 8 1/2 percent interest, compounded annually. (Few bonds compound annually. Instead, most pay simple interest.) The bank president determines that Mayberry now owes Frank about $350,000. And of course their coffers do not carry that kind of cash. So the city fathers attempt to appease Frank and hope to persuade him to accept a smaller financial settlement. The townsmen paint and restore the house Frank has been evicted from as a gesture of their good will.
Then Andy discovers, on further inquiry, that the bond was purchased when North Carolina (and Mayberry) was part of the Confederacy and is now worthless. So Frank goes from being delinquent on his taxes and evicted from his home, to sudden wealth, then back to poverty again. Only in Mayberry.
I thought about the storyline and realized that it packs a powerful financial message. A small investment in one's early life can grow to a significant amount years later through compound interest. We can’t always control the returns we get, but we can control how early we begin saving and investing.
Let’s consider a couple who, at age 30, begin saving $1,000 from each of their paychecks, and invest everything at year's end. At a 5 percent return, their combined investment would be worth $1,594,532 at age 60.
Or imagine that at age 22, you invest only $10,000 total at year's end, and your investments average 5 percent, compounded annually. At age 62, your investments would be worth $1,207,997. Had you waited 10 years until age 32 to begin saving and investing $10,000 annually, your investments at age 62 would be worth $664,388, a difference of over half a million dollars.
Compound interest means, of course, that you’re earning interest on your principal and your earned interest, not just on your principal. The results of compounding have fascinated everyone from Einstein to Charlie Munger (Warren Buffett’s business partner).
The message, of course, is to start saving and investing as early as you can. The power of compound interest is one financial factor that works for us and not against us.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.