Scheurman – Scavenger Hunt

Topic:

Tax-Sheltered Accounts or 403(b) Retirement Savings Plans:
The Magic of Compound Interest


1040 EZ SHORT FORM


This is NOT financial advice, just information to consider.

TIME is your most valuable asset when it comes to investing. Most school districts allow teachers to participate in “Tax-Sheltered Accounts” (TSA) where PRE-TAX dollars are taken out of your paycheck each month and automatically invested in retirement funds managed by an investment company (there are variations to this). In addition to reducing your overall tax burden NOW, the money invested grows TAX-DEFERRED over the course of your entire life (assuming positive returns on the investment), or as long as you leave it in the account. TSA’s are in addition to regular state retirement contributions, social security, etc. They work similarly to Roth IRA’s, if you are familiar with those.

“Compound interest” refers to the fact that all interest or dividends you make are automatically re-invested. The effect of compounding is so dramatic that the potential growth of invested dollars can be strikingly large. For example, let’s say you start making small contributions at age 25 and do so every month for 10 years and then STOP making contributions for the rest of your life. Your friend waits until he is 35 to begin making contributions, then makes monthly contributions TWICE as large as yours for 30 years. Assuming an identical interest rate of return on your investment, YOU are likely to accumulate MORE money than your friend by the time you are 65! In fact, it could be CONSIDERABLY more.

Various considerations can affect the outcome of any financial decision, including expenses associated with certain funds, actual yields on investments, gyrations in the stock market, etc. So, again, this is NOT financial advice, just an introduction to how compound interest works. The formulas can become pretty complicated, but I have listed a few websites below that show the math fairly clearly.

Here is a simple but dramatic arithmetic example:

http://www.cbe.wwu.edu/Hall/MBA542/benefits_of_investing_early.htm

Here is an explanation of compounding and the value of starting early:

http://www.russell.com/us/Education_Center/Learn/Compound.asp

Punch line: Even a little investing early may amount to a considerable gain later on. I think this has a metaphorical lesson as well as a financial one, pertaining to the value of small investments in our intellectual and spiritual lives that accumulate or “compound” over time leading to substantial “gains” later on. This concept can be abused if we take it only for its materialistic advantages, but I am certain that it applies in the “invisible” realm of the soul nevertheless. It turns out that the “value” I think I missed by not listening to Clark Lupton can be returned seven-fold if I open myself to the experience of spiritual value. This is a topic for another time. …

Note:

There are many other sites, some with additional information such as the famous “Rule of 72” (showing how long it takes to double and investment). If you want to stretch your understanding, here is a website that describes the Rule of 72 and I also discovered that Wikipedia covered the technical aspects of the topic quite thoroughly:

http://www.howtoadvice.com/CompoundInterest

http://en.wikipedia.org/wiki/Compound_interest