# No Magic in the Power of Compound Interest for Personal Finance, etc.

The U.S. stock market produces about a 7% inflation-adjusted annual return, on average. Consequently, the return on an investment in the whole market (or even an index fund of just the S&P 500) over a number of years can be approximated by the equation FinalValue = Principal × 1.07^Years. This fact is frequently used to show the impressive growth in an investment over time. For example, if a 25-year-old invests \$50,000 in Vanguard’s VTSAX index fund, s/he would have about \$50,000 × 1.07^40 after 40 years (Age 65) = \$50,000 × 14.97 = \$748,723. The same amount invested at Age 18 would yield a higher multiplication factor of 1.07^47 = 24.05, leading to a balance of about \$1,202,285 at Age 65. If, however, one invests the \$50,000 at Age 35, well… 1.07^30 is a measly 7.61, which is only \$380,613.

The stock market actually yields somewhere closer to 11.69% in nominal dollars on average, but the 7% figure is inflation-adjusted and somewhat conservative… Over 40 years, 7% returns yield 14.97× while 11.69% returns yield 83.29×. At first glance this might seem wrong, but only if you don’t notice the multiplicative element of 1.1169 × 1.1169 × 1.1169 × 1.1169 × 1.1169 … et cetera. Consequently, investing in the stock market at 7% annual average yield versus a CD at 1% annual yield is not just seven times better… It’s seven times better on average over a single year. Over multiple years, not only do the benefits of investing in stocks grow far faster than linear addition, but risk also declines. As a short-term investment, stocks are quite risky, but if you are investing for 40 years… there is much less risk. Our \$50,000 invested at Age 25 at a 7% annual yield grows by 15-fold; at a 1% annual yield… well, 1.01^40 = 1.49-fold, which is a pathetic \$74,443 versus a monstrous \$748,723.

So, 7% versus 1% annual yield yields a 10-fold difference over 40 years… but that’s with the principal included. If we deduct the principal of \$50,000, it’s \$24,443 versus \$698,723, which is actually 28.6× better. This is a legitimate mathematical maneuver, because obviously we don’t want the principal muddying the calculation… If it was one year, it would be \$50,500 vs. \$53,500 which is only a 1.06× difference with principal included, but a 7.00× difference if we just look at return on investment (ROI).

However, the power of compound interest too often becomes a demotivating counterfactual for people in middle age… or perhaps even people in their late twenties! The “magic” that happens here is not magical—it’s just exponential growth, or, literally multiplying the same number, the annual yield factor, over and over. That is to say, the compounding (exponential growth) curve remains the same regardless of entry point. At 7% annual yield, you could invest \$50,000 at Age 25 and have \$748,723 at Age 65… or, you could invest \$53,500 at Age 26 and have the same result. If you enter the curve at Age 35, you would need to invest \$50,000 × 1.07^10 = \$98.357.57 to have the same result at Age 65 as investing \$50,000 at Age 25. Of course, this oversimplifies risk, which is lower by investing in stocks for longer periods, but as long as you are over 15 years or so, it probably doesn’t make much difference… albeit, at Age 50 you would need \$271.371.63 to get to \$748,723 at Age 65… but that is still a tremendous return of 2.76× (or, 176%).

Because the exponential growth curve remains the same regardless of entry point, larger investments in middle age can make up for lack of investments in youth. As a corporate shill, one’s income tends to greatly increase in middle age, so it is not “too late” for you to achieve financial freedom in old age, provided you aren’t prevented from investing by the materialistic lifestyle that flushes every dollar you earn down the toilet. (Credit card interest compounds the same way, but against you, and often at 20% instead of 7%.)

Taxation aside, disconnecting exponential growth from your age is useful, because the two don’t actually have anything to do with each other, mathematically speaking. If Alfred Nobel puts \$50,000 in a VTSAX trust fund, in 100 years the account would be at \$50,000 × 1.07^100 = \$50,000 × 867.72 = \$43,385,816… and that’s an inflation-adjusted figure. But, recall that he could also put \$748,723 in for 60 years and still wind up with \$43,385,816. Not magic at all, but just a property of exponents.

# Notice of Intent Not to Complete Financial Literacy Course

I’m not going to complete my online, self-paced, self-graded Introduction to American Personal Financial Literacy course, which is about two-thirds complete based on the March 2016 outline. I also won’t be completing nor publishing the Udemy draft course.

Originally, I intended to complete the course as part of my Capstone projects for my Applied Learning & Instruction M.A. at University of Central Florida in the spring 2016 semester. However, in March 2016, my professor was so impressed with my draft submission that she said I didn’t need to do any additional work to graduate. I intended to complete the course later, initially by April, then June, then August, and then December 2016, but did not actually take any action after the 2016-03-23 draft.

In the Education Ph.D., Instructional Technology program at University of Central Florida, I am learning about instructional systems design (ISD), which reveals that my approach to constructing the course was neither systematic nor aligned. While the literature reflects a need for a financial literacy course grounded in ISD and research on personal financial outcomes, given that I am rather competent and self-disciplined, building such a course obviously doesn’t intrinsically motivate me, because if it did, I would have been actively working on it over the past half-year.

My explicit decision to not complete the course comes late, but does not have to be framed as a failure. In fact, if I had announced up-front to myself and others, after contributing enough to complete my Master of Arts degree, that I had no intention of going any further with the project, the project’s situation would be identical now, sans procrastination and failure to keep my word. I feel relieved I am letting go of any personal pressures to complete the course, and this will serve as a learning experience for me to, in the future, not commit to things I have lost interest in or am not actually going to do.

# Financial Thoughts, July 2016

Here is a comment exchange between the author (“J. Money”) of the Budgets are Sexy blog and I, July 8–11, 2016, concerning vehicle purchase decisions and investing. I have been following J. Money’s blog for a few months now—I would definitely recommend reading it and similar blogs if you are interested in changing your financial perspective. My comments also elucidate some of my viewpoints on Toastmasters, financial concerns for college students, market timing, risk, and insurance.

Comment by Richard Thripp, 2016-07-08:

The brief Brexit crash was actually a good buying opportunity, though it is easy to say in hindsight. I think when adding money from a bank account via Vanguard, the transaction doesn’t post until the next business day, meaning the price you see now is not the price VTSAX will be at when your “buy” order actually posts.

I would agree given the much lower value your Lexus minivan shows for private sales that you paid too much. However, many others make far worse decisions—I have young friends who literally have 15%+ car loans due to not understanding how credit works (meaning, they didn’t have their first credit card or student loan until AFTER the car loan and got their loan at a used car dealership).

With such high liquid net worth, why do you choose to pay 3.45% interest plus credit inquiries when you could just buy the car outright? Why do you have an \$1859 warranty, which is clearly a money-maker for the warranty guarantor, when you could easily use your savings as your warranty? I suppose you are benefiting in the 10% “mix of credit types” portion of your credit score by having a car loan, but this seems no more worthwhile to me than keeping a credit card you don’t use that has an annual fee, just to avoid the hit to your average age of accounts from closing it (which doesn’t even occur until 10 years later, as far as I know).

Even most rewards checking accounts do not offer a 3.45% return. Most outlooks for the stock market are tepid compared to returns in recent years. A 3.45% return with no risk to the principal is pretty good.

I’ve been reading your blog for a while. You are definitely still a half-millionaire since your net worth estimates are very conservative. You aren’t including the value of most of your possessions, and you have barely any debts. Very smart.

Response from blog author, J. Money, 2016-07-09:

Thanks man 🙂 Yeah, actually just got an offer for the blog and my other project which raises the worth substantially more, but I never count on any of that until it’s actually a reality so that’s why I don’t include that stuff (I turned down the offer, btw).

As for liquidating some assets to pay for the car, it’s too slippery of a slope for me – I never like touching investments cuz it would tempt me too much to make it OK to do for other stuff down the road. And I honestly don’t mind taking on some debt and paying for the convenience of it since I know I can pay it off at any time and manage it responsibly. Plus, my investments will make much more than 3.45% anyways over the years 🙂 And actually gonna spend some time and try and get it refinanced lower too as soon as the chaos winds down….

thx for stopping by btw – just checked out your site, your background is pretty impressive! especially in the speaking stuff – always admire that about people as I hate it. Keep hustling 🙂

Response by Richard Thripp, 2016-07-11:

Thanks for replying and checking out my site, J. Money! Toastmasters has been great… when I started 2 years ago I was super nervous but after being a club president and giving two dozen speeches I have improved greatly. It’s not really “public” speaking per se since you only have an audience of 10–20 people you already know, typically, so it’s a good segueway into more anxiety-provoking environments.

As for my education, financially I find it a very interesting topic. I still live with parents and have all my degrees (AA, BS, MA, starting PhD next month) from public community colleges / universities. This is so much cheaper than going to private institutions or moving away (though not as exciting). It must be awful to come out of undergrad with \$100K+ debt which is quite common with pricey private institutions. Alarmingly, what is becoming more common is that people incur debt without ever finishing their degree! Might be a good blog post topic.

I can definitely understand the “slippery slope” dilemma, and I too think the VTSAX index fund will continue to yield more than 3.45% annually. Heck, it yielded much more than this over the past 10 years, even considering the 2008 crash.

I am glad you turned down the offer for your blog—I am sure it wouldn’t be as good. So many blogs turn bad when revenue generation becomes the #1 priority.

Best Regards,
Richard T.

# The Components of Credit Scores [PowerPoint]

Presentation Summary: Learners will be informed of the components that make up their FICO credit scores and the factors that contribute to these components. Learners will come away with actionable steps they can take to improve their credit scores.

Created by Richard Thripp and presented on 4/27/2016 at Port Orange Toastmasters to fulfill Project 1: The Technical Briefing from the Technical Presentations manual in the Toastmasters Advanced Communication Series.

The word belvedere was incorporated into slide 16 because it was the Word of the Day selected by the WordMaster at the 4/27/2016 meeting of Port Orange Toastmasters.

Tags: financial literacy, credit scores, fico, credit cards, personal finance, money management, credit bureaus, toastmasters

# Designing an Online Financial Literacy Course: Companion Paper for Introduction to American Personal Financial Literacy

The following paper was completed on 2016-04-12 for my online course, which will not be completed. Please download the PDF version or Microsoft Word 2013 version to read this paper with proper formatting. To view the incomplete course, including over two hours of video, please visit www.udemy.com/fin-lit-intro or thripp.org/fin-lit-intro.

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Designing an Online Financial Literacy Course:

Companion Paper for Introduction to American Personal Financial Literacy

Richard Thripp

University of Central Florida

April 12, 2016

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Abstract

How can we increase financial literacy and encourage beneficial behavioral change, such as responsible spending and avoiding high-interest debt? This companion paper to the online course on Udemy.com, Introduction to American Personal Financial Literacy, reviews the recent literature on American financial literacy and explores how to make an online course motivating and enjoyable. Important issues are covered, such as the effectiveness of existing interventions and workshops, the financial state of the general public and specific at-risk groups, and how the present course implements efficacious frameworks including cognitive load theory, achievement goal theory, expectancy–value theory, and the mindset model. Overall, the focus is on creating a survey course for adult learners that subsumes the Jump\$tart Coalition’s National Standards in K–12 Personal Finance Education, while providing targeted strategies to address common financial problems.

Keywords: financial literacy, online courses, pedagogy, course design, e-learning, personal finance, money management, Udemy, instructional design

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Designing an Online Financial Literacy Course:

Companion Paper for Introduction to American Personal Financial Literacy

This paper serves a dual purpose: first, it provides a framework to educate the learner on a wide range of basic financial issues, based on peer-reviewed financial literature and motivational principles. Second, it explains the rationales and methodologies regarding instructional design, instructional devices, and topic selection for the present course.

Themes and Issues

Financial Literacy Education Issues

Teacher preparedness. Typically, teachers feel unprepared to teach financial literacy skills, even though they recognize how important these skills are to K–12 students (Way & Holden, 2009). They frequently lack content knowledge regarding more advanced topics such as investing and risk management, and two-thirds of teachers report being unfamiliar with financial education standards put forth by the Jump\$tart Coalition or their state (Way & Holden, 2009). This lack of preparation may result in low feelings of self-efficacy for teaching the requisite skills, reducing motivation to make such attempts (Pajares, 1996). In fact, less than one-third of K–12 teachers in Way and Holden’s (2009) survey reported teaching financial topics at all.

These issues are particularly salient for K–8 teachers, who are less pedagogically prepared than high school teachers at teaching financial concepts. Lucey and Maxwell (2011) identify both teacher education and curriculum development as being deficient areas—textbooks often encourage developmentally inappropriate practices such as teaching decimalized dollar amounts to K–2 students, and exercises often “tack on” dollar figures to math problems without any financial literacy context.

Adults lack basic knowledge. The lack of K–12 financial literacy education is a potential reason for American adults’ surprising lack of financial knowledge, which leads to predatory exploitation by payday lenders, rent-to-own stores, and used car dealerships (Karger, 2015). However, mandating one-shot financial literacy classes in high school does not appear to improve financial literacy (Roszkowski, Glatzer, & Lombardo, 2015). While integrating financial education throughout the K–12 curriculum (as suggested by Jump\$tart Coalition for Personal Financial Literacy, 2015) would be ideal, the current generation of adults remains under-educated. This may be remedied through education that demonstrates value (e.g., education provided at teachable moments) and meets adult learners at their current levels of development (e.g., Gredler, 1992). Continue reading Designing an Online Financial Literacy Course: Companion Paper for Introduction to American Personal Financial Literacy