♪ [music] ♪ – [Narrator] Previously,

we learned about opportunity cost. But how can this concept

help us save smartly? We’ll dive into an example illustrating the miracle

of compounding, and use opportunity cost

to understand the importance of saving and investing

early and often. Let’s take these two

investment scenarios. In the first scenario,

meet Myopic Mary. She starts saving in her 30s, and by age 45 has $20,000. She then invests this money

in a retirement fund that earns a 7%

annual rate of return and doesn’t touch her investment

until retirement. How large will Myopic Mary’s

$20,000 grow to be if it’s growing at 7% for 20 years,

until she turns 65? For simplicity,

we’ll use the Rule of 70, which allows you

to quickly approximate how long it will take

for an investment to double in value given a specified rate of return. To see how many times

Myopic Mary’s $20,000 will double, simply divide 70

by the rate of return or growth. So 70 divided by a rate of return

of 7 equals 10, which means her money doubles

approximately once every 10 years. Since she’s investing for 20 years,

her money doubles twice. Myopic Mary’s $20,000 doubles

to roughly $40,000 by the time she’s 55, and doubles yet again to $80,000

by the time she’s 65 and ready to retire. So she started with $20,000,

did not save a single cent more, reinvested her returns, and, after 20 years,

ended up with about $80,000. Not too bad! Now, onward to scenario two. Imagine Myopic Mary

goes back in time 10 years, and becomes Meticulous Mary. Meticulous Mary

starts saving in her 20s so that by age 35 she has $20,000. At this point, she invests

her money in a retirement fund that earns a 7%

annual rate of return and doesn’t touch her investment

until retirement. Our Rule of 70 calculations

are exactly the same as scenario one. Given a 7% annual rate of return, Meticulous Mary’s money

will double every 10 years. The only difference

from scenario one is that Meticulous Mary’s money

will double three times instead of two times. She now has 30 years

until retirement, instead of 20. Meticulous Mary’s $20,000

will double to $40,000 by the time she’s 45, will double again to $80,000

by the time she’s 55, and will double yet again,

to $160,000, by the time she’s 65. So, let’s recap. Both Marys, Meticulous and Myopic, invested the exact

same amount, $20,000, at the exact same

rate of return, 7%. The only difference between

these two scenarios is time. Meticulous Mary started investing

just 10 years earlier, and that led

to $80,000 more dollars. How can that be? It’s the miracle of compounding! Meticulous Mary started saving earlier, and that means that

when her investment reached $80,000, she had one more 10-year period, one more doubling period

still to go. And it’s that last doubling

that is the biggest doubling. When people start to save,

it often seems slow and pointless, because things

don’t change all that much. The rate of absolute change

gets faster and faster. This is what people mean

by exponential growth. And keep in mind, Meticulous Mary

stopped saving at 35. Imagine if she had continued

contributing to her retirement fund until she retired. That would be an extra 30 years

of additional savings, and additional compound returns. Now let’s think about this through the lens

of opportunity costs. Every dollar Meticulous Mary had

and invested at 35 turned into $8

by the time she was 65. Contrast this

with poor Myopic Mary. Every dollar she had

and invested at 45 only turned into $4 at 65. Quite the difference! But the real takeaway

from these two scenarios is not about Meticulous

or Myopic Mary. The real takeaway is that

you should be saving and investing early and often. And yes, I understand —

saving is hard to do. And where should you even

save and invest? Fear not. We’ll cover some helpful saving tips and details

about common retirement plans in future videos. – [Narrator 2] Check out

our practice questions to test your money skills. Next up, we’ll cover

some specific saving tips so you can invest early and often. ♪ [music] ♪

## Ronald Rebolledo

September 20, 2016where the hell do you get a 7% return?

## thrillscience

September 20, 2016Except you can't get 7% these days because of the War on Savers. Interest rates need to be held at zero to keep house prices propped up.

## Analytically Sound

September 20, 2016Your video quality has shot up exponentially, nice job.

## Walter Conner

September 21, 2016Question what is a dollar? What will the purchasing power of that currency vs original purchasing power of those said dollars?

## Walter Conner

September 21, 2016For those who question where to get yield REITS, MLPs, and perfered shares, oil shares, IEP has a decent yield. Their isn't a thing known as safety only a dangerous world that you can mitigate risk and diversify assets. I like gold the most but it doesn't produce income though but it can't default or go bankrupt either.

## Vicko Seno Saden

September 23, 2016how about marketing topic?

## Al mesiah Troops

July 30, 2017Work hard at young age and millionaire at dying moment. Reality

## Gogoleate este

February 19, 2018When meticulous Mary was 20 she had the W presidency for 8 years and her investments didn't compound shit until she was 30, now she shares her destiny with myopic Mary that started at 30….

## Tech Stuff

April 22, 2018myopic Mary had more fun spending her money when she was young –

## Pray To The Only God

May 22, 20184 sins are the source of humanity major trajedies, and mindlessness, for these 4 sins, God promised eternal hellfire for doers in the day of judgement:

1- Praying to another deity with God.

2- Murder

3- Fornication/Adultery

4- Persistence in eating usuary

## M

June 13, 2018I'm 23 with about $20,000 to invest, just opened a mutual funds account today. Eventually will open a direct investing account so I can buy ETFs, just wanted to learn the basics first. I'm excited about this!

## chelsey hough

July 16, 2018Not true you can get around 8% net return on commercial property investment alone i.e student property in the UK. You just have to Google and there is always options ok granted itay be for a fixed period however just reinvestment after that period

## Cornell Benefield

August 3, 2018inflation will ruin the dream of compounding interest.

## QueenOfAll_ Lady Rose

April 18, 2019The number is 72 NOT 70!

## Ray Cervantes

May 15, 2019where the F is she getting an annual rate of 7%