“Retiree Donates Fortune To Education”
So screamed the headline of an Associated Press story on October 15, 1991. The article referred to a former UPS worker who amassed a $70 million dollar fortune despite never earning more than $14,000 a year. Tony Robbins even picked up this story and mentioned it in his book Money: Master The Game.
Now, granted Theodore R. Johnson did eventually become a board-level executive, and $14,000 a year was a lot in 1952 when he retired. In fact it is equivalent to $127,000 a year in today’s money. But we can ignore inflation in this instance and marvel at the sums involved:
- Mr Johnson saved approx. 25% of his gross income annually, ie. $3000 a year
- He started at UPS in 1924 and retired in 1952, so at most he saved $84,000 over the course of his career
- Yet by 1991 his investments had grown into a $70 million fortune
People who met Theodore R. Johnson before he passed on in 1993 called him a generous and honest man. He lived in a modest two-bedroom apartment and read ‘4 or 5 books a week’. With his money he established a large scholarship fund for needy students.
Did Theodore Johnson have a good job? Yes of course. But would you be happy with such figures today? I think most people reading this article could save $3,000 a year. And I also think most people reading this article would be happy to turn it into $70 million.
How Is This Even Possible?
What rate of return did Mr Johnson’s savings earn him? Having made $70 million it must be something crazy right? Wrong.
For simplicity let’s assume Theodore Johnson saved the full $3000 every year of his 28 year career, and let’s account the 40 years of subsequent retirement where his money had further time to grow. During these periods he averaged an annual rate of return of just 12.5%!
Interest on Interest
Johnson’s riches are thanks to something called compound interest. This is a fancy way of saying that interest also earns interest. For example, if you deposit $100 in an account that pays 20% interest a year, after 1 year you would have earned $20. As you now have $120, after the second year you would have earned 20% interest on $120, not $100. Breaking this down, year 2 would earn you $24, composed of:
- Original investment: $100 x 20% = $20
- 1st year interest: $20 x 20% = $4
Thus after 2 years you would have a total of $144. The extra $4 may not seem like a lot, but over a long period of time these small extra amounts combine to produce exponential growth. The kind of growth that lead a humble UPS worker to a net worth of $70 million!
Compound interest is a topic I will touch on again and again, because it is fundamental to your financial trajectory. It cannot be ignored: you either earn it, or you pay it.
Lessons From A Legend
So what are the key lessons from this success story?
- Establish and maintain a consistent habit of spending less than you earn
- Invest over the long term to benefit from compound interest
- Develop a passion for personal finance over a desire for expensive things
Thoughts? Leave a comment below!