Financial Idiot 010 - When will we be rich?

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DISCLAIMER: I'm an idiot and this isn't financial advice! You can lose money when investing, and you should never invest money you don't own or you can't afford to lose. I'm not responsible for your decisions!

No, the title isn’t misleading. It is only a matter of time to get rich with a combination of continuity. Welcome to a new Issue of “Financial Idiot”.

As I said last time, today we will look at compounding interest. A while back, I didn’t fully understand how the effect of compounding interest would work. Luckily there was a video by Horst Lüning again. I think I linked to his Channel in the past. There is also a great video by Finanzfluss, which you can find here.

So, I know you expect content, so here we go. I’m leaving out inflation for simplicity, and I will use simple numbers.

Alice has a savings plan and saves 100€ per month. She decided to use some kind of All-World ETF which delivers 9% per year. Although considering the inflation of this year, even 9% could be too low, it is probably the most steady one. As a side note, Alice is 20 years old and will retire at 60. So she will save for 40 years.

Now, if we crunch the numbers, after 40 years of saving 100€ monthly, she will have 48.000€. Not that much, eh? Now let’s look at the numbers with compounding interest. For your viewing pleasure and to make it easier to follow along, I made a google table document with the numbers you can find here.

After ten years of continued investing and letting the compounding interest work, she already saved 18.231,52€. When she’s 37 (18 years of funding), she will surpass the 48.000€ she would have after only saving her money (with zero interest; mind you, with inflation, that 48k€ would be way less).
At the age of retiring, she will almost have half a million euros (443.150,24 €). And that is with only 100€ per month.

Now you might say I can save 200€ per month, that would double my money at retiring age, wouldn’t it? It would, and you would be almost a millionaire (886.300,48€).

But things can get even more exciting. Let’s say Bob invests 100€ too, but he raises the monthly saving every time he gets a pay rise (Table Sheet „Bob 100€“). For example, everybody in Austria who works under the „Kollektivvertrag“ will get one yearly. For simplicity, Bob receives a raise of 4% per year, but he only invests 2% extra. So he keeps 2% of the raise for himself, and 2% is directly reinvested. This means the 100€ per month will rise every year.

After ten years, Bob will have 19.686,33€. 1.454,81€ more than Alice. But the impact gets more significant over time. At the retirement age of 60, Bob will have 548.298.30€. 105.148,06€ more than Alice. It is crazy how the compounding interest affects every calculation.

Of course, that is not the end of the story. Let’s have a look at my numbers. I’m 27, and, again, for simplicity, I’m saving 200€ a month on the „Vanguard FTSE All-World UCITS ETF - USD ACC“ (ISIN: IE00BK5BQT80, WKN: A2PKXG, ExtraETF).

It is a relatively new ETF, but I will use the p.a. value (9,56%) anyways. (Table Sheet „Philipp 200€“) Ten years from now, I will have 43.432,48€. At the retirement age of 65 (probably 70 by then), that is almost a million again (858.346,00€).

And now show me the traditional savings plan that gives you that numbers? Of course, the stock market is volatile. There might be years where you make way less interest (I expect that the current year will be one of those), but every year you buy „cheap“ shares, you gain more of them than in an „expensive“ year. It is all a matter of time and continuity. In the long-term view, you always win, or at least your heirs will :).

I thought about including the 21 Shares Crypto Basket. Still, the values of crypto are just way too volatile to calculate something from it currently.

We will finally take an overview of my crypto portfolio in the next issue. Also, as a lookout, in issue 15, we will look at my fiat portfolio again, as the last insight will be half a year old. I might do the insight posts regularly now, but I think I will combine fiat and crypto into one post. Which would mean Issue 23 (no, I didn’t prepare that many yet) is a complete overview (maybe including debt?).