If you are waiting till you have more money to start investing, you are making one of the biggest mistakes of your life. Compound interest is the most powerful financial concept you can learn. You need to start investing today to take advantage of this eighth wonders of the world.
Time is Key
Compound interest allows your money to explode. When interest compounds, you do not just earn interest on the money you invest, but also on the interest you have previously received. This is how you get a real hockey stick growth (see picture) of your investments. Compounding interest allows you to use your money to make money.
Since compound interest is so powerful, the amount of time you invest becomes more important than how much money you invest. Yes, you can actually put less money into your investments and end up with more money just by starting early. For example, if you contribute $100 from age 20 till age 65, you will end up with $483,668.74. Not bad for $100 a month but, if you don’t start investing until you are 30, that drops to $215,635. The easiest way to win with money is to invest for a long time.
Time invested is even more important than picking the best investment. In the previous example, both the 20 and 30-year-old earned an 8% rate of return. To end with the same account value, the 20-year-old could have had as low as a 5.5% rate of return. We always want to pick the best investment, but almost any investment is better than waiting to start.
Waiting to Start Makes Investing More Expensive
Not only does starting early help you end up with more money, but it also allows you to take less out of your pockets to invest. By giving your money more time to grow, you can actually make smaller investments to reach your goal. If your goal is $1,000,000, a 20-year old only needs to put away $207 each month, but a 30-year old would need to put away $464. The 20-year old would have only contributed $111,708, whereas the 30-year old would have parted with $194,880. That is almost $80,000 cheaper!
The difference is so massive because the money that you invest today affects your ending value more than the money you put in 10 years. By giving it more time to compound, the smaller investment can outgrow a more massive investment. Today is the day to start investing.
If there are years you do not invest, let them be years when you are much older. By starting to invest today, you create freedom in your life when you are older. Investing today may allow you to lower your retirement contribution to help your kids pay for college. Or protect you against being downsized. You may even be able to leave a job you hate and find lower-paying but more enjoyable work for the last ten years of your career.
Imagine Doubling Your Retirement Savings.
Imagine taking $500,000 and turning it into $1,000,000. There is an easy way. Your money should double roughly every ten years. Start today, and do not wait ten years, and you will roughly double your wealth at retirement.
A simple rule to remember is the rule of 72. It states that if you earn 7.2%, your money will double every ten years. If you make 10%, your money will double every 7.2 years. Starting ten years early, let’s could let you double your wealth.
Just starting investing today could be worth $500,000 to you!
You Must Start Today
With time making this large of an impact, you must start investing today. Too many of our parents are having to work longer than they want, at jobs they do not like because they did not start investing early enough. We live in a great country with many opportunities. Don’t let a couple of nights out a month stop you from being wealthy.
Maybe you do not have $100 a month, and no amount of cutting the budget will get you there. Start with what you have. Start now and increase what you invest each year.