I love the Eighth wonder of the world. I adore the power of compounding interest. And as I understood it better, I started to save more of my income so that I could spend more on investment products and grow my wealth further.
In mid-2019, I stopped the miles chase. By the miles chase, I was not just charging to my miles card expenses that I would have paid with cash but also spend on more than I would have done. I still charge to my cards though, the difference this time is on necessities and essentials.
I wrote about Compounding Interest and Rule of 72 three months back when I just started writing. As a new year has just begun, I thought it was wise to reiterate the importance of starting your investment journey early – not just for yourself, your spouse or even your newborn. Even for my child, investing small dollars amount monthly into equities or power of compounding a $100 monthly SA cash top-up from young is going to work wonders when she turns 55. The whole idea of investing early means you can start off smaller to achieve the same target as if you were to start later. We will see more on that later.
We have 2 distinct individuals above. The adopter of “Save and Invest Early” started off at age 23. The “Wait and See” doer only starts after realising the need to start investing at age 33. Even if the early adopter stops investing after 10 years, he would end off more than the late adopter who continues to invest all the way for the next 35 years. The initial capital outlay? A stark difference of $78,000!
Business Insider did a simulation for how much you need to save and invest to build $1million by age 65. Let’s take a look at the required daily savings. Assuming that every 5 years that you start early, the absolute amount is roughly 50% lesser. For my child who begun on her investment journey at age 0, she needs to commit to at least 12.5 cents daily. That’s $5.58 monthly, or $66.80 yearly. Wow!
We are doing way more than that, so on paper, numbers show that we are in good hands for the long term.
There is another side of the story. What if you totally stop investing today, how much do you need now for x number of years to reach 1 million dollars? Once more, at 7% compounded returns, a newborn would only need $10,746.99 from the start with no additional capital and 67 years of compounded returns to get 1 million dollars.
You start early, you need a smaller amount. Okay we get the hint.
The only time that is too late is to start tomorrow. It is great to start today, even better yesterday. The short story is, we need time to be on our side and we could help ourselves and even our family members to inculcate the habit of saving and investing early in life.
What’s your saving and investment plans for 2020?
9 thoughts on “Why Investing early matters”
Love this. I’ve been preaching this to my friends and family members since I took my first business finance course in college. I can definitely relate. Paying this thing forward now to make life all the easier down the road. Compound interest is without a doubt the average Joe’s way to great wealth. This year, I ‘ve maxed out my Roth 401K (waiting for employer to finish matching) and am letting my earnings compound in my little, but growing business. Hoping to use the cash flow from my current job and business to diversify into real estate at some point in 2021.