When you’re hanging out in your 20’s having the time of your life (hopefully), it’s hard to get your brain to start thinking about your future financial life. You’re probably thinking you have tons of time to figure it all out. After all, there’s 50 years between now and age 70 when you plan to retire. So what’s the big deal if you hold off investing for a bit?
The Big Deal
The big deal about investing early is that you can take very small amounts of money, like $5 a day, and watch it grow into very large sums of money. For example, if you invest $5/day (roughly $150 month) for 50 years (at 5 percent), without withdrawing any of it, you could accumulate $378,546.50.
In another example, if you have just $100 that you invest one time, and it earns 5 percent interest each year, at the end of year one you will have $105. If you do nothing at all, you would have $110.25 at the end of year two.
When You Start Now
So let’s look at another example with larger amounts invested per month over a different period of time. Perhaps you invest $200 per month starting at age 20 until you reach age 50 (30 years). If the rate of return is an average of 8 percent throughout this entire time, you would have more than $273,892 in your account. If you increase your investment to $250 a month, your account would grow to more than $342,365 with the same rate of return. And if you invest $500 a month for the same period of time, you would amass more than $684,731.
When You Wait
So what happens if you just hang out in your 20’s living your “best” life and don’t start investing until you reach age 30?
You still plan, however, to retire at age 50 (considered early retirement). If you invest the same $200 a month from 30 to 50, your investment account would have $110,760. Even if you increase your monthly investment to $250 a month for the same 20 years, you would only have $138,451. And if you invest $500 a month for the same 20-year period, your account would have $276,902.
So how does this happen? What would cause even a small contribution of $5/day to balloon into such a huge sum? And why does investing a larger amount ten years later amount to such huge losses? The answer is compound interest. Compound interest happens when the interest you have already earned, earns interest.
The Wonderful World of Compound Interest
So let’s take another look at the daily $5 per day investment. In the example above, you earn $5 interest in the first year. In the second year, the $5 earned after your one-time $100 investment will earn $.25 in year two. And in year three, that same $100 initial investment will show an interest amount of to $15.76 for a total of $115.76. And in year four, the interest would be $21.55 for a total of $121.55.
So over a 4 year period, without any additional contributions, your $100 investment will earn $21.55 in interest. This doesn’t seem like a lot, but the higher the amount of your regular, recurring investment amount, the greater your gains will be as well.
Waiting until age 30 to start investing instead of starting at age 20, could cost you as much as $407,829 if you invest $500 a month. This is the wonder of compound interest. And when you combine compound interest and time, you’ll be on your way to a nice retirement nest egg.
Get Started Now!
You can do your own calculations based on your unique situation by going to Investor.gov. Your investments should always be in reputable investment accounts that you have researched and are comfortable with. Or you can consult an investment advisor for more guidance.
Remember, the later you start, the bigger the potential loss to your financial future. Get started now! Even if you only start with $5 month, getting started is the key. And once you start, keep increasing the regular amount of your investment over time. If you are successful, and don’t disturb (take money out of the account over the years) your account, you will have won at the investment game and your future self will thank you for starting early!
