Everyone knows that investing early can dramatically change your future, right? Duh, Andy. But, how much can it actually change? The answer is a lot…
I know a lot of people that don’t think that they need to invest now. I frequently hear people say that they’re going to spend their 20’s just spending money, not really saving anything, and then figure the rest out later.
And when I say that I hear people say this, I don’t just mean my friends – I mean like actual people in the financial community that are younger.
Excuse my language, but what the hell?? Like you honestly couldn’t say something any dumber than that. Ok, maybe you can, but as someone IN THE FINANCIAL COMMUNITY, what are you saying?!?!
I mean, this is compounding 101. Think about it – let’s assume you make 10% on your investment every year. If you invest $1.00 in Year 1, you will have $1.10 in Year 2 (110%*$1.00). In Year 3, you will have $1.21 (110%*$1.10).
So, by putting your money if you put your money in for only two years, you earned $.10 but the third year you earned $.11, so that extra year was worth an additional $.01. Yes, who cares – it’s a penny.
But, you’re likely investing more than $1.
To keep this example going, if you did invest $1 this year and you earned 10% each year, do you know how much you would have in 2075? Guess. Seriously, take a second and guess. Don’t do the calculation, just guess what you think it would be.
You would have $207.97. Holy crap.
I’m no mathematician, but that’s a big freaking return. Now let’s imagine you decided to invest $2000 right now and are going to retire by 2060, and on average you receive an 8% return (CAGR since 1950 is 11%, so 8% is very conservative).
In 2060, that $2000 would have turned into $46,924.97!
That’s pretty awesome!
Now, let’s imagine instead of investing this $2000 in 2019, you had decided to invest that same amount in 2014, just 5 years earlier. Your new retirement amount would be $68,948.17! That’s 47% more than you had investing in 2019!
Below I’ve outlined a chart that will show you exactly what kind of impact that starting early can have on your financial goals. The thing that stands out to me is just how drastic the money grows towards the end of the chart, and that’s the beauty of compound interest.
You’ll notice the yellow highlights at the bottom that show what your money would look like if you had started saving in either 2014, 2009, 2004 or 1999 with that same assumed interest rate.
Yes, if you invested $50,000 in 1999 and received a 10% growth rate each year your total would be over $689 million in 100 years.
I know that nobody has $50,000 and can let it sit for 100 years (if so, you’d be the coolest baby ever) but this is truly a financial hyperbole to overstate how important starting early is.
And just because you don’t have $50,000 that early doesn’t mean that you, as an adult, can’t put money aside for your children when they are born to assist them, or even to assist their grandkids.
I’ve hit on this topic for a few posts in a row with me, but this really does stick out – like sometimes you’ll hear people say they’re the first of their family to go to college, and they’ll brag about it, as they should!
But how cool is it to say something like, “I put $10,000 in a brokerage account and if it gets 8% interest for 100 years then that initial $10,000 will turn into nearly $22 million.
Now that’s how you setup your family for success!
And it doesn’t have to be $10,000, but the simple thing to note is that a small sacrifice now can forever impact your family in indescribable ways and pave the way for them to be financially independent and continue to pay it forward to future generations.
The point that this article is really trying to make is that no matter how much or how little you have, start as soon as you can, because you’re missing out on valuable time for compounding.
Your mindset shouldn’t be that every year you wait, you’re missing out on 10% of your initial investment but rather look at the difference when you want to retire. So, for instance, if you want to retire in 2050…this is what it would look like…
Your $2000 invested in 2019 at 10% would give you a return of $38,388.68 by 2050.
But, if you had started just one year later, in 2020, you would’ve missed out on that entire year of compounding. So, you can’t think that you’re missing only $200 (10%*$2000) but instead you’re missing out on much, much more than that…
As you can see, your actual opportunity cost is nearly $3500…quite a bit larger than the $200 you might think you’re actually losing out on. Point being – get started as early as you can.
What to Do if Investing Early with Your First $500
I recently was asked by a friend what to do with their first $500. Their mindset was that they needed to save up thousands and thousands of dollars before they begin to invest.
I don’t often agree with Jim Cramer, but he’s one to say that you should put your first $10,000 into the S&P 500 ETF (like SPY, IVV, etc.) just to make sure you’re really taking advantage of the market and then invest in individual stocks after that.
While I don’t necessarily agree with the dollar amount (can be much lower), I do agree with the premise to get your money into the market as soon as you can, even if not an individual stock.
So, do me a favor, and more importantly do a favor to yourself and your family, and start investing early as soon as you possibly can.