Do this exercise.
Rachelle starts out with 10,000 and invests it aggressively. She gets 40% return in her first year. (She is a genius!) But she has to pay 35% tax on her gain because she sold appreciated stock. The next year, she repeats the feat. (Wow, she has the touch!) The next year, things turn, and her strategy isn’t working anymore, and she loses 50%. (Drat!) How much does she have now?
Penelope starts with $10,000 and she invests it wisely. She gets a steady 12% return (Boring?) three years in a row, and does not sell any stock so she does not have to pay any tax on her gains – the gains keep compounding. How much does she have after three years?
Answers – Rachelle has $7,938, and she lost three years.
Penelope has $14,049.
Moral – don’t get wiped out doing something dumb.
Bonus – How much does Penelope have after 10 years of 12% returns without selling any stock?
How much if she sells it all after the 20 years and pays her taxes on the gain if she pays 20% long-term capital gains tax to the Federal government and 8% income tax to her state?
Bonus answers – She will have $31,058 after 10 years. If she sells, she will walk away with $25,162 after tax.
What if she does not sell and let’s it ride at 12% for ten more years?
$96k!
All about your investment risk. Once you assess your risk you can fall in the investments you are comfortable making.
If she sells after 20 years: she walks away with ≈ $72,251
After 30 years (no sale, still compounding): $299,764
Great message Larry, all of your messages are! Letting it ride is most often the best play. Maybe not to get rich quick, but get rich for sure… Almost sure 😋
$96,461.43
If my math is correct t $96,461.43
Period B4 Tax After Tax
10 Years – $31,058.48 $25,162.11
20 Years – $96,462.93 $72,253.31
30 Years – $299,599.22 $218,511.44
Every 18 year old should be required to spend some time working / playing with compounding growth (investing) and amortization (loan payoff) tables like this. Interest rate is your best friend or worst enemy.
97,898.50
Before and after taxes (assuming she isn’t in a higher tax bracket at any point!)
10 Years – $31,058 or $25,162 after tax
20 Years – $96,463 or $72,253 after tax
30 Years – $299,599 or $218,511 after tax
Thomas Woodford and I came up with the same numbers. Did he use Excel to? I agree that every child before they are released into the wild needs to understand this principle. I also believe they should know how to use Excel. It’s a powerful tool!