You may be wondering what Bobby Bonilla, an above average baseball player from the 80s an 90s has to do with compound interest. Well this story really resonated with me about the power of compound interest and the effect it could have on savings

A trip back to better days

I used to love collecting baseball cards.  Between the ages of 7-13, I probably spent a number in the thousands of dollars on baseball cards.  At the time, I thought that they were a good investment, but I did not understand the laws of supply and demand.  What I thought was a good investment, crumbled.  Those thousands of dollars have now turned into tens of dollars.

The height of my baseball card obsession was from about 1986-1990.  Part of my collection was a couple of rookie cards (yes I know that their 1986 Topps Traded are the actual ones!) from a young dynamic duo from the Pittsburgh Pirates.  Those two would be the core of 2 of 3 straight NL East titles from 1900-1992. (Bonilla was traded to the Mets after the 1991 season)

.                         

Above Average

I am not a baseball aficionado, but I would classify Bobby Bonilla as an above average player.  He was a six-time all-star, and a World Series champion once with the Marlins in 1997.  He had a career batting average of .279, hit 287 home runs, and did have over 2000 hits.  Not a hall of fame candidate, but still not too bad.

What he might be most remembered for, however, is the contract that he signed in 2000 with the New York Mets, one that has gone down in history.

Bobby Bonilla Day

For Mets fans, until 2035, July 1 is also known as Bobby Bonilla Day.  After a pretty horrible 1999 season, the Mets released Bonilla but still owed him $5.9 million on his contract.  The Mets needed to free up some cash and so they asked Bonilla to defer his payment until 2011 and receive 25 installments at 8% interest.

This would have been a bit of a gamble for Bonilla, as he would not get paid for ten years. (Though he did go on to play for Atlanta in 2000 and St. Louis in 2001) In essence, by delaying payment for 10 years, he gained 8% interest each of those years.  Moreover, by taking payments in 25 installments, Bonilla also received a continued 8% interest over the remainder of the balance.  All told, the $5.9 million has turned into $35,797,446.  Every July 1, the Mets pay Bobby Bonilla $1.193 million.  They will continue to pay this until 2035.

You may think that this makes absolutely no sense from the Mets point of view, In 2000, inflation was at 3.4% and the Fed Funds rate (the rate that banks loan money to each other) was at 6.5%.  So while 8% sounds pretty good, it was no guarantee that it was the best option.  In addition, the Mets were also embroiled in the Bernie Madoff scandal at the time.  It is easy to give up 8% interest in a year if you think you will be getting a guaranteed 10-12%

Also, with the $5 million that they didn’t pay Bonilla, they were able to sign pitcher Mike Hampton who helped lead them to the World Series in 2000, so it wasn’t all bad for them.

Compound Interest

While you can debate who got the better end of the deal, what is not debatable is the power of compound interest.  Turning just under $6 million into almost $36 million is pretty impressive.  It also has real-world applications for everyone.

In the marathon that is saving for retirement, it seems like a never-ending task.  When looking at the 4% rule, you roughly need about 25x the annual amount of spending that you want in retirement.  So if you want to spend $40,000 per year in retirement, then you need to save $1 million to do that.  This seems like an impossible task!  However, with the benefits of compound interest, it does make it much more manageable.

They say that the first $100,000 is always the hardest.  Eventually, you are not only saving money each month but also gaining interest on the money you have already saved.  It definitely has a snowball effect.

Imagine that I start out with $1000.  Perhaps I am able to save $500 per month for 30 years.  Let’s also assume that I am able to get 7% interest per year.  After 30 years, I will have deposited $180,000 into this account.  However, because of compound interest, the value of the account would be $612,102.  Let’s chart it up for those that like pictures!

The importance is to start early, or if you are later in life, to start immediately.  The longer that you have to compound your money, the better off you will be. If you put off saving or hope that the government will provide, you might be in trouble.  Every penny counts and the more you invest, the further along you will be.

Don’t believe me?  Test out a compound interest calculator yourself to see how your money can compound over the years.

As an aside, take a look below at an ESPN story about Bobby Bonilla day.

Join up and trek with us!

Join our mailing list to learn all of the latest news and info.

Trek with us!

You have Successfully Subscribed!