Question

I want to accumulate $50,000 in an account to buy the boat of my dreams.  This money will be in a taxable account.  Should invest in asset producing 10% return through income or one producing 10% return through growth and no income? Explain

Answer 1

The basic difference between return through income and return through growth and no income is that the former is a simple interest scenario and the latter is the compound interest scenario. The compound interest scenario lets our money grow at a faster pace and lets us achieve our goal earlier than the simple interest scenario. This is because the interest (income) that you forego by not withdrawing any interest also earns interest. Hence, the interest-earning interest is what makes compounding the "8th wonder of the world". Therefore, we should choose the latter option.