What you say about the 100k is partly not true. If you invest 100k from day 1, the potential profit of 7-9% is much higher than later. That's why credit is used to invest, like Lombard loans aka leverage, but it's not the same. Factors are: timing, amount of money, time and return. For most people, it is most difficult to do without the capital, so the savings rate is capped at e.g. €250-500. This means it takes even longer for many people to reach this sum of 25-215k and feel the effect at all. You have 100k, next year the S&P rises again +30%, due to the return sequence risk you lose 30k! In the 2nd year, these 30k plus and the original 100k are already working for the investor.
Note: Strictly speaking, the compound interest effect is minimally noticeable from 25k.
The magic 100k refers to a Buffet interview from around 1980. Adjusted for inflation, it would be around 215k today. 7% pa of 215k is 15k p.a. which 99% do not pay in here. (At 9% almost 20k p.a.) The effect is so strong that it doesn't matter what you pay in and you are set for the rest of your life.
Note: Strictly speaking, the compound interest effect is minimally noticeable from 25k.
The magic 100k refers to a Buffet interview from around 1980. Adjusted for inflation, it would be around 215k today. 7% pa of 215k is 15k p.a. which 99% do not pay in here. (At 9% almost 20k p.a.) The effect is so strong that it doesn't matter what you pay in and you are set for the rest of your life.
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•@Maximilian01 You don't feel any increased compound interest effect at all if you simply invest 25k. Zero, nada. 1% of 25k is the same interest as 1% of 100k or 1% of 1 million euros in the first year. 1%. You are confusing the absolute interest value with the compound interest effect. Just imagine you can invest 10k per month. At what point would you notice a compound interest effect? The answer would be 1 million euros. Because it's only after 7-10 years of investing the same amount that you see compound interest that equals your contribution. That's why it's said that you only "save" your savings rate at the beginning and that it takes time. The same answer of 7-10 years comes if you invest 1 euro every month. The interest calculation is not affected by the absolute figures.
The 100k is what a normal person can save in the 7-10 years, which is why it doesn't matter whether you adjust for inflation or not. You won't see a noticeable increase outside of your own savings plan contribution until then, regardless of whether the final sum of your savings is 100k or 200k or 500k.
The 100k is what a normal person can save in the 7-10 years, which is why it doesn't matter whether you adjust for inflation or not. You won't see a noticeable increase outside of your own savings plan contribution until then, regardless of whether the final sum of your savings is 100k or 200k or 500k.
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@Madhatter5566 You should read people's answers more carefully. @Maximilian01 is absolutely right. We are talking about absolute figures here. The average person can invest between €5k and €15k per year in absolute terms. So with assets of €100k and a 7% return, many people's assets increase more than their own contributions.
I myself have therefore taken out a Lombard loan. The dividends from the invested sum pay the interest and the increase in the value of the shares and dividends means that I end up with more than without a loan.
I myself have therefore taken out a Lombard loan. The dividends from the invested sum pay the interest and the increase in the value of the shares and dividends means that I end up with more than without a loan.
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•@Botrux Then you didn't read what I wrote. The statement referred to the "From 100k your return explodes and everything suddenly goes faster" or similar, which is simply wrong. It explodes thanks to compound interest and it doesn't give a damn about the absolute investment amount. It only cares about the amount of the annual return and the time. And it starts slowly, no matter what absolute figure you invest. Imperceptibly at first.
Look at it this way: If you pay in 100k every year, you won't notice compound interest after one year. But again only after 1 million euros.
The statement that things suddenly take off from 100k is therefore fundamentally incorrect.
That your interest income is absolutely higher due to absolute figures. Of course. Missed the point.
But go ahead, always. Amuse the mathematicians. Please show that the interest effect changes with larger absolute numbers. Always close.
Look at it this way: If you pay in 100k every year, you won't notice compound interest after one year. But again only after 1 million euros.
The statement that things suddenly take off from 100k is therefore fundamentally incorrect.
That your interest income is absolutely higher due to absolute figures. Of course. Missed the point.
But go ahead, always. Amuse the mathematicians. Please show that the interest effect changes with larger absolute numbers. Always close.
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@Madhatter5566 In purely mathematical terms, it makes no difference to the compound interest effect. You're right on that point, but when investing you don't just pay attention to one point. However, I was talking about the original investment and that the savings rate is overtaken at 100-215k. The interest calculation does not change in the future, but the potential return in the future does. For example, 100k inherited and from now on 500€ p.m. or wait 7 years until you reach the 100k. You radically jump on the fact that it has no mathematical influence on compound interest, but say whether it is inflation-adjusted or not is irrelevant. Yield sequence risk, tax, inflation and the original sum naturally have an influence. It's like making a fire for which you need fuel, oxygen and heat. In this case, the fuel would be the capital. It does make a difference whether you light just 3 pieces of wood or a fallen tree. Maybe not at the beginning, but later on it does.
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•@Maximilian01 If you start purely from a one-off investment, your return will not explode any faster. Instead, it increases just as much as if you had only invested 1 euro. Which is why it doesn't matter whether you adjust for inflation or not. The absolute amount of the investment does not change the compound interest effect.
That it is better to invest money immediately, yes. That it is better to invest a lot of money and not withdraw it in tranches over the years, yes.
In my opinion, the hype is about reaching or needing any sum X as quickly as possible. It's even a brake on motivation for poor people. Which is also wrong. Someone who only invests 50 euros a month will work just as hard in ten years as if they were investing 200 euros a month.
Especially those who can only save a little should bear this in mind. You don't need 100k. It takes time. The amount is what you can raise, no matter how high it is.
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That it is better to invest money immediately, yes. That it is better to invest a lot of money and not withdraw it in tranches over the years, yes.
In my opinion, the hype is about reaching or needing any sum X as quickly as possible. It's even a brake on motivation for poor people. Which is also wrong. Someone who only invests 50 euros a month will work just as hard in ten years as if they were investing 200 euros a month.
Especially those who can only save a little should bear this in mind. You don't need 100k. It takes time. The amount is what you can raise, no matter how high it is.
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@Madhatter5566 I never spoke of a pure one-off investment. I described the effect and other reasons. Inflation has an impact, but straw man arguments don't help the discussion anyway. Some may argue that the amount doesn't matter in order to feel better, but in the end what counts is what's in the account and not feelings or motivation or the opinion of others. Even if you don't have any money, you can take out a small loan and have more leverage. Still better than a furniture loan at Ikea or a new car with -70% in the next 5 years. It's all a question of attitude.
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@Maximilian01 You see. Your thinking is exactly the problem: Because of the wrong information that you need the 100k to have an effect (which does not depend on the amount of the investment) you take risks with loans and other nonsense.
Loan and investment? What do you do with a 50% DD?
And where was I in the straw man? You start with ikea loans.
Loan and investment? What do you do with a 50% DD?
And where was I in the straw man? You start with ikea loans.
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@Maximilian01 I've given up too. There's no point in discussing it here.
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•@Botrux Well, he himself writes mathematically I'm right. So everything else he remarks and invents is unfortunately just wrong. Then of course you can let your cognitive dissonance prevail for a while, but unfortunately mathematics doesn't lie. Since it doesn't lie, I am also correct in real terms. There is no such thing as excess interest or excess return due to a different investment amount.
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@Madhatter5566 Get well soon 🦍
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