The True Cost Of A Savings Account Loss
When money leaves your account, it goes to work for somebody else.
It will never work for you again.
What’s left in your account will work to eventually recover what was lost.
But the money that left and the time needed to recover it, is gone forever.
Why is this important to understand? Let’s take a look…
Dave, age 28, suffered a small 5% loss in his 401K, totaling just $5,360.
It took Dave’s account balance one year to recover. But as Albert points out, losses compound.
Using the rule of 72, if the money was not lost in year 2 and had continued to grow at 7.2% annually, Dave’s account balance would have doubled in 10 years as illustrated on the left.
However on the right, the 5% loss has compounded to $22,386.00 or 11.4%. And if Dave’s account never lost another penny, at age 90, the little $5,360 loss would compound to $399,247.00
- Losses are voluntary. You do not have to expose your savings to potential losses in order to enjoy the gains when they occur.
- Losses are always more devastating than we originally think.