By: Eric Parker
Eric Parker lives in Seattle and has been teaching Tableau and Alteryx since 2014. He's helped thousands of students solve their most pressing problems. If you have a question, feel free to reach out to him directly via email. You can also sign up for a Tableau Office Hour to work with him directly!
According to a number of questionable sources, Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
I have no idea if Einstein said that, but I do know that the quote is powerful and true!
In 2007/2008, I was in high school. My initial memories of the impending recession were watching 5-minute bits of Jim Cramer on Mad Money talking about the market implosion while I stretched in the gym locker room. Little did I know that the market turmoil was going to affect me more personally in short order.
Source: https://www.nytimes.com/2008/10/20/business/media/20carr.html
My dad ran a business that sold pet supplies and small animals to regional pet stores. It had been successful for 25+ years going into 2007. That industry was already struggling due to declining interest in small pet ownership (my personal hunch is that fish tank ownership per capita peaked well before the 2000s).
After several years of difficulties, my dad decided to step down from running the company and hand it over to other partners. At the time, I didn’t know how deeply the financial stress ran. That story belongs to my parents more than me, but they decided to overhaul their lives. They partook in a program through a friend’s local church called Financial Peace University.
My mom gave me one of the books written by personal finance guru Dave Ramsey and I dug into it. I’d been working hard running a small landscaping company in the summers with a couple buddies, saving money for college. I read about compound interest and it just made sense.
Source: https://www.amazon.com/Total-Money-Makeover-Financial-Fitness/dp/0785289089
The general premise is that over time, a generic stock market index may return 6%-12% in interest per year. If you factor out other complications like taxes, that means that however much money you put in will grow *on average* by, let’s say 8% per year.
So if you put in $100 on day 1, it will *on average* be $108 one year later. Leave that $108 in for a year and it will $116.64 by the end of year two. So your interest earned you $8 in year one and $8.64 in year two.
Here’s the crazy part. If you leave that $100 to grow at an 8% annual rate for 30 years, it would be worth $1,006.27!
You don’t need a PhD to see how you can take advantage of this, just discipline and patience. The best strategy would be to invest as much money as you can as early as you can and let the snowball roll. Living below your means, investing your money smartly (generic indexes are boring but reliable) and leaving it to grow is a time-proven strategy.
If I’m trying to decide how much to invest or what my retirement accounts might look like in “x” years, I’ve traditionally utilized the MoneyChimp compound interest calculator. I think it’s a great and simple tool.
I thought it would be fun to recreate it in Tableau and add a few additional elements to demonstrate how much interest impacts your future value over time.
You can interact with the live Tableau dashboard I built below.
Here’s a direct link to the dashboard.
You are welcome to download that workbook if you want to pull it apart! I’ll detail how I built the workbook in next week’s blog post.
*Please note I am not a financial advisor! You of course should do your own research and consult with knowledgeable people before selecting and implementing an investment strategy.