Scenario 1: Take Out a Student Loan

The effect of compounding can be felt in the growth of a nest egg or the balance of a debt. See the first graph below during the age of 18 to 23. During this period, the fictional student is attending school, borrowing $25,000 per year for tuition and living expenses.

After 5 years, our model student graduates and begins to pay off the debt. The momentum in the downward direction is the effect of compounding (in the outbound direction). With determination, however, the debt is paid off and compounding begins working in our model student's favor.



At retirement age, our model student begins to draw a modest annual distribution, growing a bit each year for cost of living increases. At the average 7% rate of return, our model student runs out of savings around age 90.

Scenario 2: Use a College Fund or Scholarship

Ok, this next part is mainly for the parents out there (unless you have chosen your parents well such that they have provided you with a college fund!) If you want to leave a legacy for your children, pay for their college. The model below is identical to the student loan model above, except the loan is removed, demonstrating a scholarship, or college fund provided by parents.

See the dramatic lifetime effect in the chart below! The green line (savings) and the red line (withdrawals) are unchanged, but they are dwarfed by the sheer size of the nest egg! Look at the scale at the left. Yes, those are millions!

How can this one change make such a difference?

It erases $125,000 in principle and interest, so every dollar saved is working to build wealth instead of paying off debt.

Notice that the nest egg does not get into positive territory until age 50 with a student loan. Without a loan, savings and compounding begins a full 25 years earlier!

You don't have to leave your kids millions to position them for wealth. They have a lot of years over which a small amount can grow into a fortune!