Answer: $160 contributed monthly
Questions:
- How does $160/month over 40 years (which is a total of $1,014,810.38) become over $1 million?(Hint: think about compounding)
- Do you think that you will invest at least $160/month? Less? More? Why or why not?
- Now that you have seen the power of compounding, when would you recommend someone start investing?
Behind the Numbers (Investor.gov):
It has become increasingly important for students to understand investing since they will be responsible for their own retirement. I also like this question because it demonstrates the power of compound interest and consistently adding to your investments.
So, first have students estimate how much they need to save monthly over a 40 year period to have a future value of $1 million at the end of the period. Tell them to assume their stock market investments earn a return of 10.65% (which is the geometric average from 1970-2020 for the S&P500, according todata compiled by NYU) and that the amount they contribute every month remains constant.
Once they have each written down their guesses, you can project thisinvestment calculatoron the screen. Youmight start by putting some of your student guesses into the calculator before arriving at the correct number of $160.
To show the power of compound interest, you can have students calculate how much they needed to contribute in order to create this future value of over $1,000,000. Multiplying 480 (40 years) payments by $160 equals $76,800. So in this case, the impact of compounding has almost a 13X multiplier effect:$76,800 was contributed to create a final future value over $1,000,000.
-----------------
For more information on compound interest, check out the NGPF Math Collection and look under the Exponential Equations section!
----------------
To receive a Question of the Day in your email inbox,subscribe to the NGPF Blog.
About the Author
Mason Butts
After graduating from UCLA with a Master's in Education, Mason spent 5 years as a science educator in a South Los Angeles public high school. He is committed to supporting the holistic growth of all students and empowering them to live a life of relational, academic, and financial success. Now settled in the Bay Area, Mason enjoys facilitating professional developments and partnering with educators as they prepare students for a bright financial future. When Mason is not building curriculum or planning a training, he can be found cycling, trying new foods, and exploring the outdoors.
