“So, Stephanie, if compound interest is so amazingly wonderful, how come people wait to invest? How come people don’t think about like, 401(k)s until they’re in their 30s?”

“My guess? People don’t realize just how amazingly wonderful compound interest really is. And they think they’ve got all the time in the world. Also, it’s not like this stuff is taught to us in high school - you either are lucky enough to learn it from a parent, or you sort of fumble your way through it, or you get some initiative and seek out the information yourself.”

“Alright, so, let’s say you were more awesome than you are. You’re what, 20 years old? Let’s say you had a tasty job with a nice 401(k) package. And let’s say that nothing else about your life changed - you still lived with your parents, so your expenses were minimal. What would happen?”

“Well, in that scenario, I’d be able to completely max out my 401(k) - assuming I made more than $15,500 a year at this imaginary job. That’s the 2007 contribution limit for a 401(k), by the way.

So anyway, I’ve got very little expenses and I’m making, let’s say… $25,000 at Imaginary Job. So I decide, yeah, I can max out that 401(k), put the full $15,500 in and use the remaining $10,000ish for my minimal expenses.”

“That sounds pretty nice… but how much does that translate to? In retirement.”

*calculator fun* “Well, assuming an 8% annual return on that, which is probably what we can expect… that’d be $494,766.97 when I’m 65.”

“What? Seriously? Maxing out your 401(k) now would mean half a million in retirement?”

“It only gets better. You said ‘nice 401(k),’ so we can assume there’s a company match to that money. So let’s say that company match is 50% up to 6% of my salary. That means if I contribute 6% of my salary (which I am clearly going above and beyond), the company will kick in 50% of that 6%. So that’s an extra $750 that they kick in. Doesn’t sound like much, but it’s free money, and let’s see how it affects the final number….”

*more calculator fun* “That’s $518,707.30 when I’m 65. That’s an extra $24,000 just because of the $750 that the company kicked in. And we can play with it a bit further - say we do just a teeny-tiny bit better with our return, and got 9%.”

*again with the calculator* “$785,318.40.”

“Are you kidding me? One percent point puts on like… another quarter million dollars?”

“That’s right. Want to take a guess at what a 10% return would get me?”

“… it’s gotta be more than a million.”

“Smart cookie. One last thing. Say instead of just doing the 401(k) for one year, let’s say I maxed it out again the next year. We’ll drop the rate back down to 8%, though - keep it as realistic as possible. So ok, I max it out two years in a row, with company match. How much do I have at 65?”

“Let me guess - a nice cool million?”

*calculator strikes again* “$998,991.84. And at 10%… it would be $2,261,261.60.”

“I’ve gotta get me a 401(k)!”

“You and me both, buddy. You and me both.”

I do, in fact, have a love affair with the Roth IRA. (If you’re unfamiliar with it, J.D. has an excellent explanation of the Roth.) But, it is an unrequited love - the Roth does not love me back. Someday, it will. Someday, I will open my own Roth IRA and my money (and love) will grow inside it. But not yet.

A friend of mine asked me what a Roth IRA is, and whether I should get one. I sent him J.D.’s link, but I also said I didn’t think he should get one. Yet. For the same reason that I don’t have one. Yet.

We’re both carrying around some nasty, high interest credit card debt. Sure, we could start putting money into Roths, and if the Investment Gods shined down upon us, we could earn around 10% on our money each year, and the power of compounding would give us a tasty retirement. But if we’re still carrying around our credit card debt (at 17% or higher!), then we’d just be back-pedaling. We’d be paying more to the credit card companies than we’d earn.

This is where the difference between investing in a 401(k) and an IRA can really be seen. If your employer offers matching funds in your 401(k), then it makes sense to contribute, even if you’re carrying around credit card debt. But there’s probably no one matching your IRA contributions (unless you have a generous relative - in which case, go for it).

So, my friend and I, we’ve got some credit card debt to tackle. Once we’re clear of that… well, I know I’ll be beginning my sordid affair with the Roth!