Home Mortgage Interest Deduction - IRS Pub. 936

Albert Einstein was once asked to name the greatest discovery of the 20th century. Most expected him to refer to his theory of relativity, nuclear energy, or some other important development. His answer, though: Compound interest. Was he joking? Look at these figures, (coupled with tax deferral) then you decide.

If you were to invest $10,000 at 5% tax deferred interest for 20 years, your profit from the investment would be $17,126. But if you doubled the rate of interest to 10%, how much money would you earn?

Although it would seem that doubling the rate would double the return, Einstein demonstrated that this is not the case: Increasing the rate by 100% increases the return by 369%. In other words, instead of earning $17,126 in interest, you would earn $63,281.

That's the power of compound interest: Money doesn't grow linearly - it grows exponentially!

Investing monthly works just as well as when investing a lump-sum: If you invest $100 a month over 20 years tax deferred, you'll have invested a total of $24,000. At 5%, your money would earn $17,103 in interest, but doubling the rate to 10% would once again increase your profit by 369%, just as before.

Without Tax Deferral
However, there is a big difference, if you have to pay income taxes each year on the interest. Based on a 28% tax bracket, the same $10,000 at 5% interest would only be worth $20,522 and at 10% = $42,026.  Instead of ending up with $63,281 of interest at 10%, you only have $32,026.  You lose almost 50% of your profits.

If Albert Einstein was correct and the greatest discovery of the 20th century is compound interest, then the 2nd greatest discovery of the 20th century might be tax deferral. The two together are an unbeatable combination and should be a major consideration when choosing your investment vehicle.

If you want your money to grow the fastest way possible, then stop paying unnecessary income taxes. Put your money into a tax deferred vehicle.