In 2002, enrolled in a finance course while pursuing her MBA at Harvard Business School, Tina Hay realized that she was at a disadvantage.
Her classmates from the worlds of banking and consulting flowed smoothly, while she struggled to master concepts foreign to her liberal arts background.
So she started drawing.
Today, his business school drawings have turned into something bigger: Napkin Financea multimedia company that aims to introduce people to complex financial concepts through videos, text and of course…towels.
When Business Insider asked Hay what her favorite briefcase the team produced was, she picked the one that breaks down compound interest.
“It was our first, and the Einstein visual was a really fun, recurring theme,” Hay explained. “I think compound interest is probably the most important financial concept anyone can understand. It’s about everything in your financial portfolio.”
She shared this towel below:
Compound interest is the idea that the interest earned on your investments earns more interest on itself, which helps the money grow exponentially over time.
This concept is particularly useful when it comes to retirement savings. Since money kept in retirement savings vehicles such as IRAs or 401(k)s is invested and earns compound interest, it is advantageous for the saver to “preload” these accounts when starting to save. money early and letting those funds accumulate. overtime.
In fact, delaying saving for 10 years can ultimately cut your savings in half. Take a look at this graph, from “Get a Financial Life” by Beth Kobliner, which illustrates two scenarios:
• You save $1,000 each year from age 25 to 65 in a retirement account earning 7% per year — a total of $40,000. By the time you reach age 65, you will have $213,610. Or:
• If you save $1,000 each year from age 35 to 65 in a retirement account earning 7% per year — a total of $30,000 — by the time you turn 65, you will have $101,073.
In both scenarios, account returns are 7% (although investment returns are unpredictable, 5-7% is a typical range used in this type of calculation) and contributions are $1,000 per year:
Learn more about the chart »
If you wait 10 years, you essentially lose half the amount.
Compound interest: this is important.
Jessica Mai contributed reporting.