Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
The Money Matters’ Facebook page is a great way to keep tabs on what concerns Atlanta’s investors. We get all sorts of questions and comments about the hottest issues of the day – ETFs, the Euro Zone crisis, investing in gold, tax issues, etc. And, every now and then we get questions like this:
“Which would you choose: 25 cents per hour for life, or $10,000 today?”
Because I am fully committed to my Facebook relationships, I decided to fire up my trusty Excel spreadsheet and provide a detailed answer to this query. I used the following assumptions: “life” means 60 years, and the money would be invested for those six decades earning an average 5 percent return over the years. I think the numbers will surprise you – even if you’ve guessed the answer.
Obviously, the $10, 000 lump sum is the better deal at the outset. But after just 45,409 hours – that’s 5.18 years — you break even. From that point forward the 25 cents per hour begins to outpace the $10,000. At the end of the 60 years (525,600 hours) at 5 percent compound interest, the quarter-per-hour totals $835,963.84 while the $10,000 has grown to just $200,854.80.
As long as you live more than 5.18 years, the quarter per hour is a no-brainer.
This out-of-left-field question offers a reminder that compound interest is, well, awesome – especially when applied over time. Twenty-five cents an hour dropped into coffee cans over 60 years would total $131,000. But when the power of compound interest is applied, that nest egg totals more than $800,000.
So get that spare change out of the coffee can and into something that will harness the power of compounding:
I suggest you start out by putting $182.50 in this account every month. That’s just 25 cents per hour.
Which would you choose…and why?
– By Wes Moss, for Atlanta Bargain Hunter