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As chief strategist/consumer education for Charles Schwab & Co. Inc., Schwab-Pomerantz is a leading advocate for individual investors. She speaks and writes extensively about personal finance issues and is a[…]

Schwab Pomerantz discusses compound growth and how a dollar today is worth more than a dollar tomorrow.

Question: In a consumption-focused society, how can people be encouraged to save?


Carrie Schwab: The most fascinating part about saving that really motivates most people and particularly young people, is it whole notion of compound growth.

We all learned as in our math classes, but what happens is as we save a little money and then it earns interest or return, then our interest in the amount we save starts to grow itself and it just keeps snow bowling.

I will give you a little example, which is unrealistic, but it really shows compound growth. If you had a penny and it doubled everyday for 30 days, that penny would grow to over 10 million dollars. Now certainly if our money doesn’t grow that quickly. But if you show a young person just even - I am having a 8% to 10% growth rate, the amount of money, which you have at later age is really life changing and very motivating.

I think compound growth is it is really the key to that. Wso the other key motivator is having options in your life and you have to do the things that you otherwise never ever could do.


Question: How is a dollar today worth more than a dollar tomorrow?


Carrie Schwab: Well that again that is this whole concept of compound growth, that is earning interest or having growth on your dollar and so what happens is the growth itself starts to grow and earn income on it as well. So it is just again the snowball affect, where it grows and grows really fast, similar to have that penny grew.

So saving today allows to grow from one tomorrow.


Topic: The sooner you begin to save the better off you will be.


Carrie Schwab: What we try to do is get the word out to as many young people as possible. At Schwab we say if you are in your teen, or you’re 20, save 10% of your income for the rest of your life and you will be financially secured. But if you wait until your 30s, you are going to save 15% to 20% of your income. And then your 40s we say “ouch.” Then; 25% of your income; that pretty difficult to do.

So, the sooner you can start, the easier is on your pocket book.


Recorded on: March 27, 2008