Investing Tip - How to Make Time Work For You
Almost everyone has heard about compounding interest in one conversation or another over the years. Some of you may even have a pretty good understanding of compounding interest, but I doubt it many of you truly grasp the enormous power that compounding interest has to offer over time. To demonstrate, I am going to give you an example of two investors: Stan and Slater.
Stan, "The man with a plan," decides to start investing right out of high school. While Slater, "I'll wait til later," decides he needs to get his life organized before he can worry about investing or anything like that. In the meantime, Stan has started investing $2,000 a year into Rock Solid Mutual Fund earning a consistent 9% per year. He continues to do this each year for the next 10 years for a total of $20,000 invested. At age 28, Stan has decided to get married and have a family. As a result, he no longer has any extra money to invest, so his total of $20,000 invested continues to grow at the steady 9% per year. Even though he always planned to invest more later, Stan never invested another dollar before he retired at age 65.
Now while Stan has been investing, Slater has been traveling the world. He has worked enough to pay the bills and afford several extended vacations each year. He has also been taking classes at the local university and he should have enough credits to earn a degree in business soon. At age 30, Slater earns his degree and starts looking for a career. Over the next 5 years, Slater gains some great experience and is able to land a high paying job at age 35. He is making a lot of money, but Slater still has a lot of monthly expenses. Even so, Slater knows it is time to start investing some money for the future. He decides to invest $2,000 a year into Rock Solid Mutual Fund earning a steady 9% a year. Slater continues to invest $2,000 a year every year until he retires at age 65. Over the next 30 years, Slater invests a total of $60,000, three times the amount of Stan.
Who do you think has more money when he retires at age 65? I think the answer will surprise you, but the amount of the difference will shock you.
Stan will have over $800,000 at age 65 from a 9% rate of return on his/her investment. Slater will have just under $300,000 at age 65 from his/her 9% return. Even though Slater invests 3 times as much money, it doesn't compensate for the extra years of compounding earned by Stan. Now I don't bring this up to discourage you if you didn't invest at an early age, but rather to stress the importance of compounding interest. However, if you can afford to invest more at a younger age, you will be handsomely rewarded at retirement.