Compound Interest and the Power of Saving

Richard H. Serlin, University Of Arizona

Abstract

This is an article with an included assignment that I give to my personal finance 1 students. The first 11 pages discuss in-depth the power of compound interest (or return), how even moderate savings can grow very large over the long run. Included is a great deal of explanation of the intuition for this. The rest of the article gives instructions for the assignment, with related discussion of careers, income, and the use of an easy to use Excel future wealth calculator I designed (available at: http://works.bepress.com/richard_serlin/12/ ). Before reading this article my students will have read about three quarters of Harvard Professor Elizabeth Warren's book, "All Your Worth: The Ultimate Lifetime Money Plan" (with AmeliaWarren Tyagi), so the article includes some terms and concepts from that book. However, those who have not read it should still be able to understand the vast majority of the article fine. I do, though, strongly recommend this inexpensive paperback to everyone. I think it is by far the best personal finance book on the market.