The Nerf gun and Compound interest

A little story between father and son.

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I have been reading many things of late. Here a few of my reads tonight. Seriously. I read a chapter or two of each every night. I am getting a college semester of education every 45 days.
The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History
The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets
Every Man’s Battle: Winning the War on Sexual Temptation One Victory at a Time (The Every Man Series)
Team of Rivals: The Political Genius of Abraham Lincoln
Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves (Wiley Trading)
Change Your Thoughts – Change Your Life: Living the Wisdom of the Tao
IMG_1421.JPGI remember when my father showed my the effects of compound interest. I was amazed at how money could grow… or as with many people over the past 18 months, how fast it could GO. Unfortunately, I didn’t hold my feet to the fire and keep contributing to my IRAs. I have done well by funding my 401K and overfunding my Life Insurance plans. But much of my savings had been squandered on “do-dads”, new skis, and general wants. I am a believe on holding off major purchases, but often I have given in to the consumer mentality.
For the past 3 years my wife and I have been using the “Jar System” to manage our money, and we have shared this with our Children. Each of us have our own Jars, and it has been working very well.

Well, on with the night.
After reading tonight I was sitting in my office planning my week and my son came in and was talking about a new Vulcan Nerf gun that he really wanted. His 10th birthday was coming up and he has been floating trial balloons to have us buy this gun for him. FACTS: He has a few nerf guns already. Two of which we purchased, and two of which he has saved for in his LTSS jar.
FACTS: Neither Sadie or I really like guns. And we would rather get him a new bike.
Just last week, I received a check for my son. My wife and I have been contributing to an account for him. The company sent us a full surrender check for the amount of $1,918. I was going to roll it over into another account, but tax wise it is just better for us to accept the check, pay the tax, open a trading account for him, and teach him how to trade.
After my reading tonight I was sitting in my office. My son came in and was talking about the Nerf Vulcan. I broke it to him, that Sadie and I didn’t want to get him another gun for his birthday, and we would rather get him another item.
I then decided to show him the check that would be his. Obviously the first thing he said was, “WOW… I could use $46 of the $1918”. I said, “You could, but let me show you something first.” I pulled out a piece of paper and a calculator. I wrote, while he calculated.
Using the assumption that an above average trader/investor could double the sum every 5 years.
This is what we found.
Years of Age Money Doubled
10 $1,918
15 $3,836
20 $7,672
25 $15,344
30 $30,688
35 $61,376
40 $122,752
45 $245,504
50 $491,008
55 $982,016
60 $1,964,032
65 $3,928,064
70 $7,856,128
He was amazed. Nearly $8 million without having to add to his initial lump sum at the age of 10.
I know that neither of these are not accounting for taxes, however there are interesting legal strategies to minimize taxable events. A easy to understand book is Missed Fortune 101: A Starter Kit to Becoming a Millionaire
I believe the a used book is less than $1.
We then compared the NO Withdraw figures with the idea of taking out a modest 10% for fun at the end of each period. This is what we found.
Years of Age Money Doubled less a 10% withdraw each period
10 $1,726
15 $3,107
20 $5,593
25 $10,067
30 $18,121
35 $32,618
40 $58,712
45 $105,681
50 $190,227
55 $342,408
60 $616,334
65 $1,109,401
70 $1,996,922
70% less… If we spend some of the money.
He was amazed at this too. $6 million less IF he were to take out 10% every 5 years. But it seems so harmless, doesn’t it.
Picture 242.jpgI reminded him about “The jars”. He could still have fun and spend the money that he makes through work, jobs, business, etc. He still gets to use his PLAY and LTSS jars for things that he wants. Things which make life so much richer. But the FFA ($1,918) money should probably be grown, and nurtured.
He agreed.
He then proposed to sell many of the toys in which he doesn’t use and doesn’t play with anymore. He also reminded me that I owed him $.10 a day for the past 6 weeks because he has been doing his homework as soon as he got home from school (A characteristic of nearly every straight-A student I have ever known). I smiled and gladly pulled out a crisp $5 bill and handed it to him. In return, he gave me an loving hug for keeping my word. I reminded him that he earned it for developing such a great habit, and to split the money among his jars.
He walked out of my office with a pen and paper in hand. I have little doubt by tomorrow afternoon he will have a price list of items to sell for a total $46 for the purchase of the Nerf Vulcan foam dart rifle. If earns the money, he may buy the nerf gun.

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