Thanksgiving is a time of reflection and gratitude. In my family, we start off by going around the table and saying things that each of us are grateful for, such as our health, our family, our successes for the year, and our friendships. This is a discussion of three financial facts you can add to your gratitude list this Thanksgiving.
Compounding Interest
Albert Einstein once said, “Compound interest is the eighth wonder of the world.” The reason that one of the smartest men in history regarded compounding interest so highly is that it gives investors the power to create more wealth than they thought possible with even small savings amounts. Compounding interest is easily illustrated by the Rule of 72. This rule states that if you take the number 72 and divide that number by your annualized returns, that is the approximate number of years it takes for your money to double.
Let’s say you have $100,000 and are earning 10%. Under the rule of 72, you would have about $200,000 in 7.2 years, $400,000 in 14.4 years, $800,000 in 21.6 years, and $1,600,000 in 28.8 years. You’d have 16 times your money in less than 30 years. Having compounding interest on your side is something to be grateful for.
Ease Of Diversification
If you’ve ever owned individual stocks before, you might have noticed that their price movement on a day-to-day basis can be extreme. Maybe you’ve even owned stock in a company that’s gone bankrupt, leading the stock value to go close to zero. Portfolio diversification, meaning owning many securities with different characteristics to reduce volatility, can improve investor returns while keeping risk much lower than holding a single stock. A Harvard paper even calls diversification “the only free lunch available to investors.”
In the not-too-distant past, individuals needed to have a lot of money or pay very high fees to gain diversification benefits in their portfolios. Today, through exchange-traded funds and fee compression among mutual funds, investors can gain the benefits of diversification with little to no overhead. This allows them to invest smarter and take advantage of those compounding returns.
Safety Nets
Over the years, there have been many regulations put in place to protect investors and keep your money safe.
- FDIC Insurance: Something that may still be top-of-mind for some investors is the banking failures earlier in 2023. FDIC Insurance is meant to protect up to $250,000 of insured investor money if a bank happened to fail and didn’t have the money to give its depositors. This program stepped in, in collaboration with the Federal Reserve, Department of Treasury and other banks, to make investors whole, not just up to the $250,000 limits.
- The Federal Reserve: Some of you might not be too fond of the Federal Reserve, particularly for its most recent rapid increase in interest rates, making borrowing money more expensive while creating an economic environment for lower inflation.. The Federal Reserve represents a huge safety net for investors, performing operations to stabilize the economy and lessen the burdens of downturns.
- SECURE 2.0: This recent legislation is designed to give more investors access to retirement accounts, to Roth taxation, and funds for emergencies.
Conclusion
With so much strife and hardship in the world, it’s more important than ever to practice gratitude for the things that are positive in your life. When it comes to personal finances, the items discussed above are things of which investors can be thankful.