My spouse is the first one to remind me why finance and accounting professionals, of which I’ve been both, take the fun out of everything. Whether it’s keeping the books in balance or households and divisions under budget, we’ve been known to tend to say no to some of the fun decisions that our peers suggest. While decisions without optimal financial results sometimes make life worth living and can be relatively harmless in moderation, allow me to indulge my finance habits and tell you the least fun way to spend all that paper and plastic slid into your holiday cards.
You may have already guessed where a financial planner would go with this. Whether you choose to do it or not is likely not going to be meaningful in your overall financial picture, but it does happen to be a fun way to articulate the power of compounding in the financial markets. So let’s get to the hypothetical example: You receive a total of $600 in an assortment of gift cards to your maybe-not-so-favorite stores. Not only do you have extremely nice friends and family, but you now also have $600 of value. Using gift card-for-cash websites may enable you to trade in that $600 stack of gift cards at a discount, which you could then invest the cash value. Hypothetically speaking, if you had a time machine and could travel back to 1982 to invest the $500 in the S&P 500 (comprised of 500 large cap domestic companies), in 2013 that $500 investment alone may have been worth $17,145.*
Sure, there are things like inflation and taxes that could factor into it as well as account fees if this time traveling investment plan ever did take place, but the idea does display fairly well how compounding investment returns, or letting money grow on itself, can make a big difference in one’s life. Just as importantly, it also shows how the key variable to that compounding, Time, matters. It’s a good example to show your children or grandchildren who are just now securing their first job out of school about why it’s important to not ignore retirement savings in the early years. One may be able to make up for lost time through increasing contribution amounts in later employment years, but it’s a lot harder to make up for the lost time of not compounding investment return.
So, next time you get that gift card to your favorite electronic store and want to beef up your movie collection, you could always just cash it in and invest…but where’s the fun in that, right?
*Bankerate’s Way-Back Machine http://www.bankrate.com/finance/investing/historical-returns-investing-calculator.aspx