In 2002, enrolled in a finance class while pursuing her MBA from Harvard Business School, Tina Hay realised she was at a disadvantage.
Her classmates who came from the world of banking and consulting were acing the coursework without a problem, while she struggled to master the concepts foreign to her liberal arts background.
So, she started to draw.
Today, her business school drawings have turned into something bigger: Napkin Finance, a multimedia company that aims to introduce people to complicated financial concepts through videos, text, and of course … napkins.
When Business Insider asked Hay which was her favourite napkin the team has produced, she chose the one that breaks down compound interest.
“It was our first one, and the visual of Einstein has been really fun and recurring theme,” Hay explained. “I think compound interest is probably the most important financial concept anyone can understand. It relates to everything in your financial portfolio.”
She shared that napkin, below:
Compound interest is the idea that the interest earned on your investments earns more interest on itself, which helps money grow exponentially over time.
This concept is particularly useful when it comes to retirement savings. Because money kept in retirement savings vehicles such as IRAs or 401(k)s is invested and earns compound interest, it’s to a saver’s advantage to “front-load” those accounts by starting to save money early, and letting those funds build on themselves over time.
• You save $1,000 every year from age 25 to age 65 in a retirement account earning 7% a year — a total of $40,000. By the time you turn 65, you’ll have $213,610. Or:
• If you save $1,000 every year from age 35 to 65 in a retirement account earning 7% a year — a total of $30,000 — by the time you turn 65, you’ll have $101,073.
In both scenarios, the account’s returns are 7% (although investment returns are unpredictable, 5-7% is a typical range used in this type of calculation) and contributions are $1,000 per year:
If you wait 10 years, you essentially lose half the amount.
Compound interest: It matters.
Jessica Mai contributed reporting to this post.