What caught my eye this week.
Time is something you can never have enough of when you’re compounding your way to financial freedom.
That’s because the big payoff from compound interest is back loaded.
In the early years, how much you can save from your income matters most.
But later on, your gains on money already socked away is usually what makes the biggest difference.
A return of say 10% on a near-retirement pot of £1,000,000 is an awful lot more than 10% on your first year’s savings of £5,000.
It’s £100,000 versus £500, to be precise about it.
Clearly the longer you can compound your money for, the better.
Unfortunately we can’t go back in time to begin earlier – the age-old lament of savers when compound interest first ‘clicks’ for them.
But in a novel post at On Dollars and Data, Nick Maggiulli suggests finding a few extra years further down the line as a way of boosting your returns:
How exactly?
According to the data, the answer is…exercise.
Exercising regularly to improve your strength and your cardiovascular health is the most effective way to increase how much time left you have on this Earth, all else equal.
I agree that personal fitness is an under-appreciated part of the game we’re all playing.
Few people would be happy to retire to fewer years than they might have enjoyed if they’d stayed in shape, or with not being able to do as much as they’d like due to physical limitations.
Not if they can help it, anyway. And Nick does his usual great job of marshaling the numbers to show that many of us can indeed help ourselves.
A solid exercise habit can be expected to add three to five years to your life, he finds.
Good, but even better getting fits means an additional six to eight years of your later years might be healthy – compared to if you’d done nothing.
Nick says:
You don’t need stress yourself out trying to save every penny. Instead, you exercise more, reduce your stress, and extend your life. This is a non-financial solution to a financial problem.
And while it might seem unorthodox, for those that are having trouble saving more, it might be the best option available.
Check out the full post, and then get moving!
Have a great weekend.
From Monevator
Passive vs active investing: why passive wins – Monevator
Fixing your financial posture – Monevator
From the archive-ator: how to protect your portfolio in a crisis – Monevator
News
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Bank of England postpones next interest rate decision for a week – ThisIsMoney
Average energy bills to be capped by government at £2,500 from October – Sky News
Halifax and housebuilder Barratt warn of challenges ahead for property market – Guardian
How a thief is stealing thousands from London gym goers – BBC
Pioneering study reveals the best and worst jobs in the UK – Guardian
Europe’s new dirty energy: the ‘unavoidable evil’ of wartime fossil fuels [Search result] – FT
Lloyds of London hands staff a £2,500 cost-of-living bonus – ThisIsMoney
Property investor accused of shutting down criticism over £10,000 courses – Guardian
The bad news for the pound is not all in the price [Search result] – FT
Products and services
How the new ‘energy price guarantee’ will affect gas and electricity users – Guardian
Chip launches lottery-style savings product with £10,000 top prize – ThisIsMoney
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
When will King Charles’ head appear on UK coins and banknotes? – ThisIsMoney
Natwest 3.8% Digital Regular Saver account review – Be Clever With Your Cash
Heat your clothes to save on energy bills – Guardian
Sainsbury’s Bank slashes credit card Nectar points – Which
Homes with kitchens worthy of The Great British Bake Off, in pictures – Guardian
Comment and opinion
The only equation that matters – Fortunes & Frictions
How passive are markets, actually? [Spoiler: more than you think. Search result] – FT
Retiring from unemployment – Dror Poleg
The Great British housing wealth divide [Search result] – FT
What’s alpha? – Morningstar
Some tips on successfully working from home – Humble Dollar
Financial crisis and the risk of suicide – Advisor Perspectives
Reality is messier than spreadsheets – A Wealth of Common Sense
What to do when your side hustle becomes a drag – Vox
Behind the scenes of making a Netflix documentary – Mr Money Mustache
Best option – Humble Dollar
Value shares mini-special
The linking of stock multiples and interest rates is overdone… – Albert Bridge
…but have you looked at the correlations with inflation? – Klement on Investing
Naughty corner: Active antics
Why is active fund selection so difficult? – Behavioural Investment
US equities now look pretty undervalued – Morningstar
The learning mindset for active investors – Neckar’s Minds and Markets
Blackstone-backed song rights machine suffers growing pains [Search result] – FT
The UK’s top 40 dividend stocks – UK Dividend Stocks
Jeremy Grantham: entering the super-bubble’s final act – GMO
Kindle book bargains
I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle
How To Own The World by Andrew Craig – £0.99 on Kindle
Quit Like A Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen – £0.99 on Kindle
Way Of The Wolf by Jordan Belfort – £0.99 on Kindle
Environmental factors
Investing in (unlisted) Thrive Renewables – DIY Investor
Shades of green in ESG – Humble Dollar
Killing invasive species is now a competitive sport – New Yorker
He was protecting our oceans, and then he disappeared – BBC
Why birds changed their tune during the pandemic – Atlas Obscura
How Facebook is saving snakes – Scientific American
Off our beat
The super-rich ‘preppers’ planning to save themselves from the apocalypse – Guardian
Chesterton’s Fence: a lesson in second-order thinking – Farnham Street
There’s some good news in the battle with long Covid – Guardian
How to create a simple newsletter to support your business – Spilled Coffee
The lesson from Lord of the Rings ‘review bombing’ – UnHerd
New studies further confirm link between ultra-processed foods and cancer – Delish
Michael Sheen rallies the Welsh [Video] – via Twitter
Stewart Lee: how will history recall Bad King Boris? – Guardian
And finally…
“That was leadership, it was doing the right thing, it was duty, it set an example.”
– Archbishop of Canterbury’s praise for The Queen at her husband’s funeral
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Health is wealth as the saying goes and exercise is very important at every age – without it you will most likely due a few years sooner.
But just as important is avoiding stress (in all of its forms).
People who worry or have lots to worry about (insecure shelter, work, money, food, relationships, health etc…) Have frankly terrible health outcomes.
And it’s not getting any easier – and especially so this winter with the fuel bills.
For me, FI was a way to insulate me from the worries of heating/eating and I can now stand aloof from the hand wringing about the cost of living crisis.
So now, if I have wealth I should really get into shape – exercise more, lose the ponch and get a few extra years life expectancy.
Could not agree more.
Most of you would absolutely be better off passively investing and using the time saved to get into HIIT – which I have, and see solidly as part of my retirement plan.
Start walking for an hour or so a day until you’re fit enough to exercise if that’s what’s stopping you starting
It’s a good point, investment is all about planning for your future and that isn’t just measured in money but also in the things you are healthy enough to do (and keep on doing) and enjoy.
I am not sure that aiming to be in the top 2.5% is realistic for most people (unless their hobby is gym work) but the top third should be. And the advice about the effort to put in to easily available exercise like a walk for it to have cardiovascular benefit is really helpful.
And saying exercise is better than a good diet or stopping smoking is true on paper but in practice almost all of us have a mix of good and less good lifestyle habits as a starting point, so we are not improving from the worst possible situation. If we are deficient in any of those things, putting them right will make a significant difference.
I am not sure if I imagined this, but was there an article on Monevator a few years ago that said something like… it takes 12 years before one sees the effect of compound interest on investments?
I read Nicks article and was nodding along very much like yourself. It’s an area of financial independence which seems to be less talked about but perhaps the most neglected.
At 35 I sold my online business over a year ago and I realised the importance of physical exercise as a priority. I’ve always gymmed but it’s become an essential part of my day to day. I still work but just enough to cover our day to day bills and let the money compound and do the work.
This seems to be the optimum strategy but it’s amazing how little emphasis is placed on it.
It seems to be the thing which slips most in people’s lives. They will put an extra hour in at work but perhaps not the gym. Is that a cultural thing? It certainly takes a level of discipline and dedication.
What’s interesting is the amount of comments on this post Vs a usual weekend post. Perhaps that proves the point that the most important aspect of life is sometimes neglected.
Thanks for all the hard work on the site. It’s really helped me this past year.
Re: the weakness of £ FT article. I keep seeing UK newspapers focus purely on particular problems in the UK economy that explain this situation. Whilst I’ve no doubt there are some salient points, they seem to often ignore 3 key points:
1) That, as of today, the Euro is down more against the $ than the £ over the last 5 years (-15% vs -14%). If the UK has an especially bad situation, why are we following more or less exactly the same pattern?
2) That, to anyone looking at a wide range of currencies, the predominant story is clearly one of dollar strength as they’re just about all falling.
3) That in many stock market downturns, this behaviour is apparently par for the course (GBPUSD -31% in 08/09, -18% in 99/01 for instance). Is it not that way now? Will Sterling not recover also when markets do? My running assumption is that it will, am I wrong?
Does anyone know of any good articles that discuss this detail?
As it also has quite a profound effect on short term investment returns it’d also be very interesting to understand from that angle e.g. $ world tracker VWRD YoY is -16% whilst VWRL £ world tracker is +0.5%. Does that make a hedged tracker better value currently and an unhedged one less interesting? Or is this the wrong way to look at it?
@ Ryan Perhaps we’re all just too busy mourning. That’s my excuse and I’m sticking to it! 😉
Slightly off topic, but could anyone help with the following.
A few weeks ago, someone posted a link to a website about a couple who have toured the USA in their RV, along with their cats and dog, and are now currently in the south of France.
It’s a charming blog, lovely photographs and a very relaxing read about where they’re staying, the countryside, people, reviews of camp sites etc. If you’ve read it, you’ll know the one I’m referring to.
Unfortunately, I’ve lost the link! So if anyone has it, could they post it again.
Thanks
Watched the netflix MMM documentary this morning.
Didn’t really find it that exciting.
My thoughts were:
a) how precarious it is to be a pro athlete
b) how important mental health is
c) Pete Adeney is very charming
d) how remarkably quickly the lady reduced her credit card debt
It followed the classic narrative of introduction, hint of impending doom, followed by happy ending. Much like every other documentary out there.
The 100% S&P500 and Nasdaq advice for the footballer was a bit presumptive about his risk tolerance I thought. Especially as he was coming at it all completely fresh.
I don’t think the juice is worth the squeeze in terms of making time to watch it..
Couldn’t agree more on the benefits of exercise, I am lucky in as much as I’ve baked in a lot of exercise into habits over last 15 years or so. Would be lost without it. Should really do more ideally. I spend a lot of time in the sea, which gives you that trendy cold water benefit thing into the bargain.
@far-wide how dare you talk down the Euro. You obviously don’t understand if we pool sovereignty we be able to influence Russia, have a strong currency, stop climate change, power our factories and heat our homes (special shout out to the Eurozone’s largest economy there).
The pound is the only currency that’s falling and that’s because we left the EU.
I was fortunate to gain financial independence at a daft young age, and was also lucky to realise that fitness – which I’d neglected for a decade up to that point – was even more crucial to long term well-being, both physical and mental.
Consequently, a usual week for me will, most days, have me walking the dog of a morning by the beach somewhere, often chatting to a few other punters en route. Later, I’ll either ride a bike for a few hours (with older conventionally retired buddies) ~3 times/week , or (trail-) run ~2 times/week, plus maybe one hike/week with my partner if possible. “Strength work” mainly comes from yardwork in spring/summer or a few light weights over the winter.
If I have more than a few days without any proper cardio exercise I begin to feel miserable as hell, and if for any reason I’m feeling down then exercise, preferably cardio and undertaken outdoors in nature, is the best antidote by far and works every single time.
Indeed, I’d give up most things rather than my ability to exercise as I do, such are the benefits. I know a couple of guys in their 80s who still ride their bikes a bit, so that’s my inspiration. Not many runners that age, to be fair, but I hope to walk to the end of my days if I’m able. And, try to combine a good chunk of the exercise that I do with a social angle as well, eg. with clubs or informal groups of like-minded individuals, who you can banter with. My best recipe for a contended life, innit.
I won a triathlon the other week. I’m still poor though, focussing on sport is a big part of why I’ve never earned as much as I probably could have.
@Dartmouth #4
> it takes 12 years before one sees the effect of compound interest on investments?
Technically you see the effect within a month, but as far as making a useful difference, well the tool is right here on Monevator
Sensible Susan invests £1000 a month at a real terms (inflation adjusted) return of 4.5% p.a, not a bad estimate of a broad mix of equities, and the default.
After 30 years she roughly doubles her money. Worth having, but it ain’t going to paint the town red. Against this you have to set:
Many people who can entertain the idea of FI/RE experience career progression. My retiring self earned 3 and a bit times my younger self in real terms, obviously that 3x ain’t gonna compound for 30 years, but helped me achieve the goal when I wanted to quit later. Earning more knocks compound interest into cocked hat given a working life of 30 years or so
The process of breeding and buying a house tends to mean spare for saving is much shorter in the first 10-20 years of the human working lifecycle. I don’t care how much time you spend in the damn gym, it ain’t gonna buy you 20 years at the back end.
So I’ve always said and still say that compound interest is overrated. Lovely story, but oversold IMO.
@ermine, won’t your friend Sensible Susan almost quadruple her money in 30 years? That early saving is definitely worth while.
But as you point out, there isn’t the same compound interest effect of keeping fit at a young age so realistically you need a regime you can maintain long term.
I used Monevator’s tool, setting Sensible Susan’s initial amount to £0, because I don’t know about you but I started my working life with bugger all 😉 and the term to 30 years, putting in £1000 p.a
She ends up with £63,752.39, and she has put in £1000*30 = £30k. Basically a doubling and a bit?
Ah, we haven’t done this one for a while. New readers may be shocked to hear that irrascible @ermine is one of the only people in the personal finance blogosphere who doesn’t believe in compound interest’s ‘magical’ moniker. 🙂
As someone who sheepishly had to to admit to an old university peer I bumped into at the weekend that if I’m careful about it, I feel don’t *have* to work again, I count myself bemused. 😉
Another way to think of it is that after five years at a real 4.5%, Sensible Susan has £5,700. Compound that (with no more additions) for another 25 years and she has £17,180.
So her first £5,000 has more than tripled – on its way to quadrupled – for her after 30 years.
Making a case for compound interest is definitely enhanced by the rate of return, however.
Up it by just 1% to 5.5% real, which from memory isn’t a bad proxy for global equities, and you have £5,888 after five years.
Run that forward for another 25 years and you get £22,450+, which is better than a quadruple on those early years
The real magic happens at even higher rates, which is what most people plug-in in nominal terms.
If you’re skillfull/lucky enough to get something double digit then compound interest is sort of magic. 🙂
Thanks for all the comments everyone!
(One reason there may be fewer than usual is I forget to promote it on Twitter this weekend, I’ve just realized, and also I sent the email out late due to a related technical SNAFU.)
Possibly the quickest way to appreciate the impact of the rate of return is to dust down what is known as the “rule of 72”. That is, 72 divided by the rate of return gives approximately the number of years for the capital to double. So: a) deposit £1k at 4.5% and it will take 16 years to become £2k;
b) deposit £1k at 5.5% and it will take 13 years to become £2k;
c) deposit £1k at 10% and it will take 7 years to become £2k.
The fitness thing is interesting. I’m always bemused by the bright young things and the MAMILs I work with at how much they put into gym time or beasting themsleves on Strava for some achievement that no-one in the real world cares about. I’m definitely not the fittest but one of my biggest goals for post RE is putting a lot of the time I put in at the desk to better for me outdoor stuff like hillwalking, cycling, swimming. Then of course cooking and eating healthier hopefully without becoming too boring.
Of course the side effect of being a better me might be some increased quality of life for longer which might increase demands on the pot. I’ve modelled out to 90 at the extreme though so suspect I can probably survive and the above activities aren’t exactly cocaine, fast cars, hookers & casinos in terms of cost though the price some seem to pay for road bikes certainly starts to feel a bit like it.
> my biggest goals for post RE is putting a lot of the time I put in at the desk to better for me outdoor stuff like hillwalking, cycling, swimming
It’s a relatively easy win when you have more time. I haven’t darkened the doors of a stinky gym ever since school days and the memory is still enough with me that I’d rather go earlier than do that, disgusting places IMO.
But I walk to the shops, or bike there, try to walk two or three miles most days, and have the advantage of being in fields and nature five minutes from leaving my door. There are nature reserves withing bike distance and the odd bit of hillwalking serves OK. As a result, though I don’t think I will ever see the weight I was at 21 again I am much lighter and fitter than when I was working, despite now being that much older.
There is, of course, the proviso that you can only do that if you are in decent health, and having seen the vicissitudes of age in people even a little bit younger than myself I have to high-five it to Lady Luck. OTOH I don’t see why I shouldn’t continue that for a good few years yet.
I also think that GFF is totally on the money with that it’s stress that harms people in their mid forties onwards, That seems to do for people in the cardiovascular department – heart attacks, strokes etc. I say people that were fitter than me go down with that towards the end of my working life, stress seems to do people’s nuts in in a pernicious way. Young’uns may have resilience against that but it seems to fade really quickly post 45.
Perhaps it’s proof of the pudding, inasmuch as even that low intensity stuff is reasonably sustained so perhaps it does something, but as for gymming and HIIT, sod it. If I have to do that to get compound interest to work for me I’ll let it go. If I don’t smell a gym ever again in my life with the associated memories from schooldays that would still be too soon 😉
(((1+i)^n – 1)/i) = amount after n years of saving £1 a year at interest rate i
A handy little formula for Casio fx 81 – no internet or excel needed. Also handy for mortgages too. Slight tweak needed for monthly payments
Who said actuarial exams weren’t useful in real life..
Loved the invasive species story link, made me want to take up diving so I could add lionfish spearing to my bucket list!
@ermine – it’s obvious you haven’t set foot in a gym for nigh on 5 decades, they’re modern places with air-con and what not, with no resemblance to the stuffy, sweat-ingrained gymnasiums from your school days! Try one out, you might be surprised 🙂
> Try one out, you might be surprised
I’d rather gnaw a leg off 😉 Yes, the original trauma was from schooldays, but the rank hum of sweat and testosterone is easily detected passing a modern gym, though I’m sure it’s a lot less bad than back in the day.
I can see the use of a gym, for folk that are working, because time is at a premium, and in the end each to their own. But as a retiree, exercise can be organic, I want it to do something for me. I will hike miles to see a prehistoric site, I will walk or bike to the shops, I will climb hills to get a view or to make radio contacts. And it takes an amount of time which my working self could not have spared. It was one of the pleasant surprises of retiring – it’s free, you get to see new stuff or you save money on transport.
The fitness article is definitely a bit of a reach/ tail wagging the dog bit, as I only really improved health wise once my finances were in decent trim – your baseline stress levels are probably the biggest factor in midlife and beyond. That said, anyone under 40 would do well to cultivate those healthy habits (as per the Monevator article earlier this week, don’t keep making bad choices and wonder where you went wrong!)
In a similar but less financial vein, I listen to Arthur Brooks’s Art of Happiness podcasts and his health episode (E18) lays out good and bad reasons for wanting to work out more.
@Ermine – All the activities you list are mostly cardio-vascular, which is great, but don’t forget about upper body strength.
The upper body muscles begin to waste away if not exercised. Personally, I hate the gym – it’s boring and repetitive. So I break it down into two or three 30 minute slots. Walk in, do four or five exercises from my routine and go home. Come back another day and work on a different muscle group.
And balance – yoga, pilates, stretch classes. Helps to avoid falls in later life, a massive risk mitigated.
If I can do most of two 45 minute runs with the dog, a couple of hour dog walks, two or three sessions down the gym and a 35km bike ride with my wife each week, I reckon that’ll do.
A dog is great for exercise. I’m off to walk mine. Then down the gym for a quick sesh!
@Brod @ermine — Another shout for adding some strength training to the mix! 🙂
Get a pull-up bar and do a few sets of as many as you can (even 2-3, even assisted with a stool or a band) and do leg squats in between with decent form. Needn’t take more than 20 minutes a day, with a podcast.
After a couple of months you’ll probably be top decile for your age. Once the strength comes you could try hanging and lifting your knees a few times at the end. The hanging is great for your shoulders, and the knee lifts will help your core.
Even modest strength training has a cascade of benefits — you stay functional longer, keeps your metabolism up (because muscle uses more energy), helps with bone health, improves your chances if you have a tumble and so on.