Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Learn how to power-up the compound effect and see your savings for retirement grow exponentially. You can reap big rewards from a series of small consistent choices you make about saving money. Financial planning professionals Joe Anderson and Alan Clopine walk you through the benefits of the compound effect and how to make it work for your financial plan. They also give you tips on how to avoid the effect of negative compounding on your retirement goals. Once you get down the basics, they show you how to Supercharge the compounding effect and help make the most of your money for long-term financial success.

Important Points:

(0:00) – Intro

(1:27) – Cup Of Joe Compound Effect

(2:30) – Retire at 65 with a million

(3:45) – Power-Up the Financial Compound Effect

(4:30) – Positive Compound Effect

(5:25) – Time: Compound Interest

(7:10) – Compound Interest Effect

(8:40) – Rate of Return: $10,000 Lump Sum Investment

(11:45) – Negative Compound Effect

(13:10) – Negative Compound Effect: Debt

(16:30) – 401(k) Mistakes: Cashing Out

(20:10) – Supercharge: Compound Effect

(21:50) – Ask the Experts

Make sure to subscribe to our channel for more helpful tips and the latest episodes of “Your Money, Your Wealth.”


Joe: Do you know what Albert Einstein called the 8th wonder of the world? If you don’t know the answer, stick around, folks. We will let you know because it could jumpstart and power your overall retirement. Welcome shows called Your Money, Your Wealth®. My name is Joe Anderson, CFP®. I’m a CERTIFIED FINANCIAL PLANNER™ and President at Pure Financial Advisors. I’m with my co-host, Big Al Clopine, CPA. Hello, Big Al.

Al: How are you doing Joe?

Joe: The 8th wonder of the world?

Al: Yes, it has to do with finance, I believe.

Joe: You are the 9th wonder of the world Big Al.

Al: I’m not so sure about that.

Joe: What’s the answer? Albert Einstein said compound interest is a wonderful thing. It is the 8th wonder of the world. Do you know how to apply it in your situation? That’s today’s financial focus.
All right. Let’s explain this real simple. We’ll talk about a little cup of Joe, no pun intended.
Let’s say that most of you like to have a cup of coffee. Maybe it’s $3.50 per day. Some of you might have a couple of cups of coffee per day. Let’s just take a look at what that potentially could cost you long term if we put the compounding effect into play here. Your average cup of coffee is $3.50. If I take a month, it’s costing me about $100. It’s $1,200 a year that I’m spending on Joe. Instead of doing that,why don’t we invest? Why don’t we save that $3.50 per day and see what that compounds at 6% over 30 years? It’s $100,000. That’s just one year of coffee turned into $100,000 in your overall retirement. I’m not saying don’t get your cup of coffee, but $3.50! Can we save $3.50? I think the answer is yes.
The other quick example here, if I want to retire with a million dollars, everyone wants that million dollars, right? What do you need to do? The compounding effect will help you if you start early. Wake up your kids and say, Hey, 20 years, 30 years, 40 years, 50 years, depending on your average age when you start. If I’m 50 years of age and I want a million dollars at 65, you’re going to have to save $3,400 a month. If I start at age 20, it’s $300. That is the power of compounding; the earlier I start, the bigger pool of money I will have.
Let’s break things down. Let’s bring in the big man.

Al: Today we are going to talk about compounding, whether you like it or not, because compounding can make the difference between a great retirement and a subpar retirement or not much of a retirement at all. Few things that we will focus on. One is positive compounding. In other words, how to use these rules to your benefit so that you’re actually taking your savings and compounding to a great future. Another one though is negative. This can work in the reverse direction if you have too much debt or you make some mistakes. Then finally, we’ll go into some tips on how to supercharge this to get into a much better position.
So, Joe, this is one of those things. It’s kind of fun to think about cost. If I save a little bit here, a little bit here and what that can grow into. It makes a big difference in the future.

Joe: Yeah, absolutely. Put it on your dream board. If I want a certain dollar figure when I retire or if I want to pass a certain amount to my kids, what does that look like? That is positive compounding. You’re right Al, there’s a slippery slope here. Some people get into that negative. That negative can have just the same effect on the downside.

Al: It can. Let’s start with positive compounding. What does that mean? The first thing is time. Time is on your side, if you start early. It’s not on your side if you start too late. Although we do get the question, I’m age 50 and I haven’t even started. You know what? Then start now. It’s better to start at 50 than 60. It’s better to start at 60 than 70. Time is your friend. The earlier you start, the better. Another would be to invest regularly. Figure out how to do that. I know that’s difficult. Some people are spending every penny they have and then some. We were doing this show in San Diego. Southern California’s cost of living is high. When you really look at it, there may be ways to save a little bit more. Then finally, your rate of return, we’ll get a little bit into investing, because that makes a big difference, Joe as well, in terms of what your portfolio is going to be. You’ve got to have it invested correctly.

Joe: When you look at time as well, let’s just put the scope of retirement for instance, I retire at 65 or age 70. I mean, I still have a lot of time left right because there’s another 10, 20, 30 years of my overall retirement. The compounding effect doesn’t stop unless you do something with your money that you’re making mistakes with. The higher expected rate of return that you have in your overall portfolio, that compounding effect really magnifies. But Al, let’s just bring it down a notch and just explain what the heck compounding actually means.

Al: We will start at the basics. Compounding essentially means you have a certain amount of money and then it grows with interest or growth or dividends or whatever kind of investment it is. At the end of the year, you’ve got more than you started with and now you’re going to compound on a larger amount. Let’s just do a little example. We’ve got a $1,000 and a 3% interest rate. It’s like a savings account. At the end of year one, you got $1,030. That’s not too bad. Now you get 3% on $1,030. Now it’s 31% interest, you got a little bit more. In the following year, you got 32% interest. That’s how this escalates. It’s even better when you have a higher rate of return. This is just an example of how this works.

Joe: You start with that $1,000 and then you get the 3% on the $1,000 then it’s a higher balance, a higher balance at a higher balance with that straight rate of return. Of course you can do the math. If you have a 6% rate of return you’re going to continue to work on a higher balance. That negative compounding also happens when you have negative returns and then you start pulling money from the overall accounts and so on. This is the concept of compounding and the power of compounding effect.
This is a really interesting and kind of cool example. Let’s talk about Jack and Jill. Shall we Al?

Al: Yes.

Joe: All right. Jack, he’s going to start at 30. Jill is responsible. She’s going to start saving at age 21. So Jill is going to put in $2,400 a year. She stops at age 30. She’s 21. She’s only going to save until age 30. She’s going to put in a total of $21,600. She’s going to start early and she’s got this nine year window. Jack, I don’t know what Jack’s doing. He’s not saving money. He’s buying cars. He’s going to the bar. I don’t know what he’s doing but he’s going to start at age 30 and he’s going to save the same amount of money but he’s not going to stop until his retirement date of age of 67. Who do you think will have the most money at retirement?

Al: You would think, Jack, right? Because he invested almost five times as much.

Joe: He saved diligently to age 67. Jill, she’s like, No, I’m going to start early. I’m going to stop at age 30. Here’s the difference folks. Jill is going to have $2.5 million versus $1.5 million because she started 10 years early. That’s compounding!
Here’s another example Al: would you rather have a million dollars or would you rather have a penny double every day?

Al: Well, I would say a million, but I guess that’s probably the wrong answer.

Joe: Exactly. Because once you get into those higher numbers that 500 doubles to a million, then the million dollars to two million or two million doubles to four and so on. That compounding fact really, really takes off. When you look at the rate of return, looking at your portfolio now, if we put it back to basic retirement strategies. If I’m younger, you want to take on more risk. If I’m older, you probably want to take on less. Here’s kind of what the numbers look like.

Al: It’s interesting when you think about it. How much difference the rate of return. We’re not saying you can earn 4, 8, 12 %. This is just an example. The higher the rate of return, the higher this can grow to you, and it magnifies with time. As you can see on this, you get out to 50 years, which I know is a long period of time. But look at the difference it makes from a 4% to an 8% to a 12%. It’s pretty dramatic.

Joe: Folks, we want to help you power up your compounding effect. Go to YourMoneyYourWealth.com. This week, our special offer is just that. We’re going to help you power up your compounding effect. Go to YourMoneyYourWealth.com. Click on that special offer icon. You can download it for free. YourMoneyYourWealth.com. Click on that special offer. We got to take a break and when we get back we’re going to switch to the dark side. We’re going to take a look at the negative compounding effect. You don’t want to miss this. We’ll be back in just a second.

Joe: Welcome back to the show. The show is called Your Money, Your Wealth® with Joe Anderson, CFP® and Big Al Clopine, CPA. We’re talking about powering up the compound effect.
Go to YourMoneyYourWealth.com, click on our white paper this week. It’s just that powering up your compounding effect, go to YourMoneyYourWealth.com. Click on that special offer. That’s our gift to you.
Before we get into the negative side of compounding, let’s see how you did on the true false question.

Al: As investment dollars compound in retirement accounts, the taxes on the money also compounds. Joe, would you say, is that true or false?

Joe: That’s true. Well it depends, I guess, if it’s in a Roth not necessarily. If it’s in your retirement account or 401(k). That’s why we always talk about tax diversification. If you have $1 that turns into $2, that turns into $4 and so on and so forth. All of that is going to be taxed at ordinary income rates. The longer, potentially, the money’s in that account, all of that compounding effect will happen and it’s taxed at ordinary income rates. That’s the beauty of retirement accounts. The compounding tax deferred. For us, the beauty on the other side of the spectrum is it’s growing tax deferred. It’s a lot larger of a balance, so they get more tax. That’s why we’re big fans of Roth, so that could be a negative side.

Al: It could be. When you think about it, that’s why we talk about Roth conversions. Getting money to a tax free environment where the compounding is actually tax free or the compounding outside of retirement, where you have a capital gain environment, which is a cheaper tax. Let’s talk about the negative compound effect. That’s probably just as important because this can work against you as well. One is excessive debt. We’re seeing now that debt is increasing as time goes on. The second thing would be excessive fees in your accounts. You can do something about the two of these. The other one would be a mistake, like a 401(k) mistake, an IRA mistake, pulling money out too early. We’ll get into that and why that’s not necessarily a good idea. So Joe, I guess right off the bat, debt seems to be increasing, for each generation.

Joe: We’ve been talking about growth of your overall dollars. It’s great that if I can earn a little bit of interest or have an expected rate of return on my portfolio, that it’s going to grow. In each year that it grows, that percentage of growth is going to be growth on a higher value. The same is the exact same truth when it comes to, let’s say, credit card debt. If you have a higher interest rate, those banks are making a lot more money on us than we are in the overall markets in most cases. Say I have $10,000 in credit card bills and they’re charging you 12, 14, 16%. That 16% is going on that $10,000 and its compound in the other direction. We are in, from a generational standpoint, this is the average consumer debt that, let’s say Gen X, Gen Z, Baby Boomers, the silent. This is the greatest generation.

Al: It is the greatest, Yeah.

Joe: I don’t know why they call it the silent generation. I’ve never seen that before.

Al: right?

Joe: You’re looking at 18 to 23, 16,000; 24-39, about 100,000; 40 to 55, 140. When you have that much consumer debt, depending on what interest rate you have here, you’re growing your assets on the wrong side of the balance sheet.

Al: Right. I actually think that includes mortgage debt also, of course.

Joe: Of course, get very specific Al. Why don’t you give me the exact breakdown and what interest rate they pay.

Al: I guess the point is every single generation the debt is going up, when you look at the last few years, except for the silent generation. Of course, it’s different for different areas.
If you look at the West Coast, the debts are actually quite a bit higher because our mortgages are higher, property is more expensive. The point is when you have too much debt, this works to the negative. In other words, if you’re saving money and you have compound your benefit. If you have too much debt and you’re paying interest, it’s going exactly the opposite direction.

Joe: We talk, control what you can control. What you can control is the amount of money that you’re saving and when you are starting to save. You can control those behaviors. You can control; do I go into debt, do I purchase this or not. Some of us, we can’t help but to go into debt because we need certain necessities. You can control those activities. Here’s another thing that you can control is the fees that you’re paying in your overall investment strategy. If you’re paying 2% in fees, all in. Most of you have no clue what you’re paying in fees. I think you’re looking at like alright maybe I’m paying 1% or I’m not paying any fees at all. Everyone is paying fees. Most of them are hidden. You probably want to find out exactly what you’re paying. Let’s say you’re paying 2% versus 1%. These numbers are staggering. Control what you can control: where you’re putting the dollars that are coming in, how early are you saving. Are you going into debt? Can you control your fees? Can you control your discipline? That’s kind of the next one where people make mistakes.

Al: This is a tough one, Joe, and I think a lot of us have been tempted to pull money out of our 401(k)’s or IRAs when things get difficult. There’s a problem with that. First of all, over half of us have done that. If you’ve done it, you’re in good company. Here’s why that’s not really such a good idea. It’s because of all the taxes. When you’re younger than 59 ½ there’s a 10% penalty for early withdrawal. There’s federal taxes too, depending upon your tax bracket and state taxes as well. We actually are in the state of California. California has an early withdrawal penalty as well. Depending upon what state you’re in, the taxes went, all told, can add up to 50%, in some cases even more. So, Joe, you think you’re pulling out $50,000 from a retirement account and you’ll get to keep about $25,000 because of the taxes and penalties.

Joe: Of course Big Al is going to talk about the taxes and penalties, which is a huge component of it. But what does that really cost you in an opportunity cost? I think this is more important because if I have that $50,000, right, you leave your company and you see this 401(k) balance and think I could pay off some of this consumer debt. I just watched Your Money, Your Wealth® and they said get out of debt. I have $50,000, I can pay off some debt, I can put some money in cash and I think this is a really good opportunity for me to get back on my feet. Well, just be careful to understand all of the things that go into consideration here. You’re right, you have that early withdrawal penalty. $3,500 federal taxes, $12,000 state taxes, $5,000. What you really have is about $30,000 out of that $50,000. What does that mean? If I had kept that $50,000 in my retirement account, 10 years later, that $50,000 is now $100,000. It doubled, assuming a 7% rate of return. Let’s say it’s 20 years, now it’s $200,000. Thirty years, now it’s almost $400,000. So you take the $50,000 out, you cash it out and you buy a new car. No one’s done that, I’m sure, right? Let’s say you did. What did that car cost you? It costs you like $400,000 in future value. You’ve got to be thinking of your future self when you want to make those decisions.

Al: When you put it that way in terms of pulling out $50,000 and keeping $30,000, whatever the number is buying a car, you’ve lost $400,000 over thirty years.

Joe: That’s a pretty big difference. I mean, that’s the balance of most people’s retirement accounts right there.

Al: If that; most people are actually even less than that.

Joe: Less than that, Right. If you’re younger and you have, alright I see this and I don’t know what to do with the money and just cash it out. Start running some numbers to see what really that decision is going to cost you. Get our white paper, it’s called powering up the compounding effect. YourMoneyYourWealth.com Click on that special offer. Speaking of powering up, let’s supercharge it. That’s what we’re going to talk about when we get back. The show’s called Your Money, Your Wealth®.

Joe: Hey, welcome back to the show. The show called Your Money, Your Wealth® go to YourMoneyYourWealth.com to power up the compounding effect, it’s our new white paper. Go to YourMoneyYourWealth.com click on the special offer.
Let’s see how you did on the true false question.

Al: It is better to eliminate high interest debt and avoid the negative compound effect than to invest money before the debt is paid off. Joe, would you say that’s true or false?

Joe: That’s a tough one. It’s a combination.

Al: It is tough, right? It is a combo.

Joe: Here’s what happens, is that I have debt and I’m just going to throw everything at the debt. I want to get debt free. I don’t like debt hanging over my head. I think that’s too hard to do because maybe that took me five years to pay off all the debt, and I didn’t have a $1 saved in five years and no positive compounding effect. You want to do a little bit of both. You want to make sure that you’re saving, but you’re also diligently paying off the debt. Are you a fan of paying off the debt first because it has a higher rate of return? What’s your thought?

Al: I do like to pay off higher interest rate debt. It’s equally important, especially if you have a 401k, to make sure that you at least contribute up to the match. Some cases it’s 3% or 4% or 5% of your salary to get that full match. That would be really important because that’s where you invest a dollar. In some cases, the company puts in a dollar for you, which means 100% of return right away. It’s really a combination. If you’ve got high credit card debt or high student loan interest you want to make sure you get that paid off too. I agree with you Joe. You want to be a little bit more careful. It’s not just one or the other. I think you want to look at both.

Joe: Let’s get into supercharging. We just talked about it. The first step of all of this is, just trying to get out of debt as fast as you can, but also making sure that you’re starting as soon as possible with your savings activities. Like Al said in the beginning of the show, it doesn’t matter if you’re 20 years old, 50 years old, 70 years old, start today! Start today and then just try to increase it as you go. As Al alluded, what people tend to do is that they increase that debt as they go. Hey, I got a car lease and I’m only paying $500 a month and then, Oh, I have some extra cash flow, or I refinanced my house and I freed up another $1,000 a month. Does that go into savings? A lot of times that goes on more consumer debt. Here now let’s get the TV. Let’s do this. Let’s do that.

Al: The other thing is in terms of contributing. Work out a way to save 0.05% or 1% of your income. Just look at your budget. There might be a couple little things you can cut out. Then the following year try to increase that to 2%. Maybe you get a little cost of living raise, maybe get a little bonus. The following year after that 3% and then over time, maybe 10 years, you’re up to 10% or 15% or 20, whatever number you’re trying to get to. That’s how you can make incremental changes and have it be doable.

Joe: Try to keep your fees low and then just attack this and let it grow. Let’s switch gears and
go to our favorite part of the show. It’s called Ask the expert.

Al: “I feel safe investing in CDs, Treasuries and bonds. How can you maximize their growth” from Sarah in Carmel Valley? That is kind of a tough one because those particular investments that you mentioned are more for safety and not much for growth. But Joe, any thoughts on maximizing your growth there?

Joe: You’ve got to be careful with the words that you’re choosing, Sarah, because if you’re looking at how do I maximize my growth in bonds? There’s all sorts of flavors with bonds. You have a Treasury bond and you have a Treasury bill. You can go into a corporate bond. You can go into a high yield bond. Then you can go into one year duration versus five versus 30. The longer that you go, even though it’s a bond, let’s say if I have a 30 year bond, that’s a junk bond or high yield bond, I’m taking on risk. You might think I’m getting a larger rate of return with this bond, which is supposed to be safe, but you’re taking on basically the same amount of risk as the overall market. With CDs; there are hybrid CDs out there that you can have some bells and whistles. If you want safety, you have to live and die by that. Right now, interest rates are really low. If you want to increase the overall rate of return, then you have to take a look at different investment vehicles. Make sure that you understand the risk and return relationship between whatever investment that you get into.

Al: The other thing too is people don’t really realize they’re taking risk in every single kind of investment. In fact, when you think about CDs, which generally don’t have as high a rate of return as inflation, you actually are losing money slowly. I mean, that’s kind of a given. It’s almost a guarantee to lose money in terms of purchasing power slowly over time.

Joe: Let’s kind of power up your compounding the fact, of course, start early and invest often. It’s the rules that keep on giving. Maximize your positive compounding effect. Making sure that you’re consistently saving, understanding what investments that you’re in. Of course, just try to mitigate that negative compounding effect as much as you possibly can. To put a bow on this thing, you’ve got to supercharge it. Just putting everything together. Understanding the pros and the cons and then really supercharge this can get to your goals that much quicker. If you need help, go to our website, YourMoneyYourWealth.com Click on our whitepaper this week. It’s just that powering up your compounding effect. Go to YourMoneyYourWealth.com Click on that special offer. That’s our gift to you. Have a wonderful weekend everyone from Big Al Clopine, CPA, I’m Joe Anderson, CFP® and we’ll see you next week.