Yesterday we learned that the real interest rate of return on high-interest savings accounts is low – a really low 2%. We found that it would take 35 years for money to double at that percentage.
Today, I’d like to look at real interest rates of the stock market. I used to say that the stock market returns 8-10% annually, but I’ve seen some recent data that for some significantly long time spans, it returns around 12%. I’m not quite ready to work with 12% numbers, but I’m thinking the 10% number is pretty reasonable for this exercise.
Using that 10% as the return of stock market, the real return (after inflation) on a stock market investment is around 6.9%. Going back to our doubling chart we find that your money would double around every 10 years. This is a great advantage over the 70 years that it would take in a high-interest savings account. For example, $10,000 in the high-interest savings account will turn to $40,000 in 70 years (doubling once at $20,000 after 35 years and again at 70). However, at the nearly 7% growth of the market, $10,000 would grow to nearly $1.28 million dollars. There’s a little rounding in this math, but the numbers still show that you’d have over 1 million dollars more in buying power by just making this small financial decision.
On a side note, I’m looking to make a 10% real rate of return on my lending in Prosper.com. I’m not currently doing that well. I hope that is due to the mistakes I made during my learning curve. With the tools that I have found, I believe that I’m closer to that goal.