September 15th, 2020
Invest Sooner Rather than Later: Start Today
From a young age, it seems everyone is chirping in your ear, pushing you to start investing and saving. This idea sounds good in theory but actually acting on it seems like the hard part. News flash: It’s actually not very hard! When you start saving and investing at a young age, you begin to form a healthy pattern that sets you up for financial stability and success in the future. It’s much easier than you thought. Trust us, you will thank those who chirped in your ear later on.
The chart shown above demonstrates three individuals with different investment patterns.
Although Susan, Bill and Chris all invest $5,000 annually, they each end up with vastly different amounts at age 65. This chart proves that time is everything when it comes to saving. Notice Susan, Bill and Chris invest for 10-, 30-, and 40-year spans, respectively.
Chris experiences the greatest return (dark blue line), then Susan (dotted black line), while Bill faces the lowest return (light blue line). Susan and Chris experience the same growth rate from age 25-35 (shown by the dark blue line).
However, Susan’s investment begins to grow at a slower rate than Chris’ investment (hence the flattening of the dotted curve) because she stops making additional investments at age 35. Susan ends up with ~$600,000 at age 65, which is a great return on her $50,000 investment made earlier in her life. Chris continues investing $5,000 annually through age 65, and his impressive return of nearly $1,200,000 shows for it. Had Susan known she could have wound up with $1,200,000 like Chris, she probably would have continued investing. Bill waited until age 35 to begin investing and did so until age 65. Unfortunately, he wound up with ~$500,000 at age 65 after investing $150,000 over a 30-year span. This number contrasts with Chris’ return even though the only difference in their investments is that Bill began investing at age 35 and Chris started at age 25.
Which begs the question: Why does 10 years make that much of a difference?
The answer is simple: compound interest, otherwise known as “interest on interest.”
The concept is almost too good to be true: Your initial investment will accrue and accrue and accrue interest over time. This interest compounds and has a snowball effect on your money. Thus, over time your investment accrues interest and so do your earnings that are reinvested.
In application to Susan, Bill, and Chris; the two who invested at a younger age earned more in the long run because their money compounded over longer periods of time.