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Comment by sosuke | Hacker News Reader

Compound interest is a joke for the 99%. My savings account gives me 0.65% interest I think? http://xkcd.com/947/ However when you start having millions on 10% interest you start talking real money, at least from the perspective of the person who will never have that kind of investment.

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Compound interest is only a magical force on long term investing with decent interest (2% is fairly low for real investing). With a somewhat realistic 7% (usual growth of the S&P500) yield over 40 years, this is actually visible:

    >>> 1.07**40
    14.974457839206984

For comparison, linear interest would only be:

    >>> 1 + .07*40
    3.8000000000000003

In the comic, the magic fails to work:

    >>> 1.02**10
    1.2189944199947573
    >>> 1 + .02*10
    1.2

Finally, do note that compound interest is a step up from linear interest, which itself would already be better than "no savings".

That was just one example though. And it's a quirk of the current moment-in-time that interest rates have been hovering around historical lows for some time now. But I stand by my overall point that lack of financial knowledge and wherewithal is a significant factor that inhibits upward mobility.

And I'd say your right. I've always just laughed a bit at compound interest after how much I was told about it as a young man.

That's a little bit odd. Here in South Africa, you regularly get 'savings'-type accounts that yield 5+ percent interest, guaranteed by the bank. If it weren't for exchange controls, you'd probably have access to the sort of market (like South Africa) that would let you have that kind of interest rate.

Then again, we also have mortgage-loans that are at 10% interest.

That's likely because you have high inflation rates (7%?). It's possible the real interest rate is actually higher in the US

There's no free lunch, that high interest rate has to be considered against the currency risk from the weak and unstable ZAR. In the last 5 years a 5% interest rate will have compounded to a 27% one. In the same time the ZAR has weakened against the USD by 125%.

You will not find a combination of a stable currency and high guaranteed interest rates anywhere.

Look at the other side, and it's far from a joke.

Avoiding paying 10% or 20% (or higher) interest is equally (perhaps more) important to a decent financial outcome.

That's why in low interest regimes you invest in shares and reinvest the dividends.

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