Compounding Interest

Here is a hypothetical scenario I created to take a peek at the past returns of the S & P 500. I used the data collected by Robert Shiller as discussed in this post.

I took a person earning the Per Capita Income for the U.S starting to invest when they were 22 in 1965 and ending in 2007 at the age of 65. The Per Capita Income in 1965 was $2,563 and $33,712 in 2007. Using Shiller's S&P 500 index return and dividend yield for the last 43 years, if a person was to have saved 15%, they would end having accumulated $877,220. If a person was to save $100 a month and matched the S & P 500 return, then they would end up at $1,074,937. If a person was to save $100 a month and return 11% a year, then they would end up at $1,064,355. The S & P 500 has averaged returns of 11.15% from 1929-2007.

This illustrates the exponential nature of compounding interest. You can scroll down on this spreadsheet by using the scroll button on the right of the spreadsheet.

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