Turning $1 Million Into $64 Million

Carl Nassib, defensive end for the Cleveland Browns [now with the Tampa Bay Bucs], has an investing lesson for all of us.

As you may know, the HBO series ‘Hard Knocks’ is following the Browns through training camp. The show reveals an inside look of NFL teams and what goes on off the field. In between meetings, Nassib took advantage of some downtime with his defensive line teammates to explain ‘compound interest’ to them.

This clip made the rounds on the internet a few weeks ago [don’t worry, the swearing is bleeped, but there’s a lot]:

Before I get bombarded with emails saying why Nassib was wrong to assume a 10% return, can we take a step back and not lose the forest for the trees? Yes, he made it seem like a return like this can be easily achieved at your local bank branch (which it can’t), and he made all advisors seem like bad people (here’s how you find the good ones). But I’m giving a standing ovation to this guy who is passionate about investing and educating his teammates on how to live below their means. Kudos to Nassib. I love it.

If you’re curious still about compound interest here’s my explanation and an example to help. With Compound Interest you earn interest on the new total balance or principal each year after the previous years’ interest is paid. In other words, you earn interest at an ever-increasing rate rather than the same amount each year. Let’s do an example assuming you start with $100 and earn 10% per year.

Year 1, you’ll earn $10, so the ending balance will be $110. Now, you start earning 10% on $110 rather than $100.
Year 2, you’ll earn $11 in interest, which brings the balance to $121. [$1 more than if you had earned Simple Interest on the original amount of $100 ($100 + $10 +$10 = $120)

Ever so slightly, you are earning more and more each year. This is how it would play out over 20 years:

As you can see, the numbers increase slowly, but then as the years go by they start increasing at faster and faster rates. $100 turns into $673  – almost 7x the original investment. This is why Albert Einstein called compound interest the “8th wonder of the world.”

Now, let me explain the math he was doing on the whiteboard to turn $1 million into $64 million.

Nassib (with a bit of rounding) showed how an amount ($1 million) will double every 7 years if you earn 10% in interest. Look at year 7 in the above table. The total is $194.9. For the sake of his argument, Nassib rounded up to $200 which would be double the $100 original amount. Or as Nassib shows if you earn 10% a year for 7 years, that’s:

1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.1= 1.949 or approx 2.0

So if the $1 million doubles every 7 years, it will look like this:

$1 million
…wait 7 years
$2 million
…wait 7 years
$4 million
… wait 7 years
$8 million
… wait 7 years
$16 million
… wait 7 years
$32 million
… wait 7 years
$64 million

So after 42 years, you’ll have an investment worth 64x the original number – ta-daa!

Here are two things I want you to walk away with:

1) Compound Interest is awesome in the end, but the process is very boring. It takes a really long time with no fanfare until results start showing. Like any athlete who does something incredible (see Ray Allen, Game 6 vs the Spurs), we see a brief moment of brilliance, but forget the years and years of reps and hard work behind the scenes to even get to that point (see Ray Allen preparation). Many people search for the highest return as if that’s the key  – just look at the comments under the video on Twitter. They think if they could just find an investment that pays 10% a year, they’ll be fine. No, it’s actually much simpler than that, but also much harder. The hardest part is patience. It’s waiting around for decades to come and go and see everyone else driving around with fancy cars. It’s being OK with boring and letting compound interest do its thing.

2) Compound Interest works the other way, too. Unfortunately, it works against you just as much as for you. Each time you buy something or take out a loan, you are literally stealing hundreds if not thousands of dollars from your future. Let’s break it down into some real-life examples. Here’s a list of things you might buy and how much those purchases will cost you in future dollars. For argument’s sake, let’s use 40 years as the timetable and stay with 10% rate of return earned during that time.

The $80 fancy dinner night out with friends. That actually cost you $3,621.
The $130 you spent on some new kicks. That actually cost you $5,884.
The $1,200 laptop you had to have. Say goodbye to $54,311.
How about the $35,000 car you got when you landed your first pay raise instead of sticking with your current one? $1,584,000. Yes, that’s $1.5 MILLION.

The point here isn’t to debate on the rate of return or the years. Yes, I agree it’s high and shouldn’t be the anchor to your expectations. Neither is the point to say all of these things are bad purchase decisions. They may very well be totally fine decisions for you.

The point is this: The financial decisions you make today have a dramatic — a dramatic — impact on your future. I hope this exercise has given you enough pause to think twice before swiping that credit card. Consider yourself woke.

Maybe it takes an NFL defensive end drawing it up on a whiteboard and trying to impress Taylor Swift to hit home. Maybe it takes me spelling out the future cost of that Apple laptop. Maybe it’ll be something else entirely. But there will come a time in your life when this will click in your brain. And it will be either soon — and you can enjoy the fruits of delaying gratification — or it will be later — and you’ll look back on your life and see how much certain things that didn’t really add up to much cost you in the end.

Now here’s what I’m reading/listening to:

What does it mean to be a financial expert (The Irrelevant Investor)
Keep your children the hell away from YouTube (Ted Talk)
Dear investor, that cocky voice in your head is wrong (Intelligent Investor)
Making reading pleasurable for teens (Washington Post)
Why California rental property is not a great investment (Jon Luskin)
How bosses waste their employees time (WSJ)