Investing is about making money grow over time. The earlier you invest, the more time you let your money grow. Time is critical because of the miracle of compound interest. Compounding means you gain returns not only on the money originally invested, but also on the interest it earns. With the power of compounding, a small investment made earlier in life could generate a larger amount as compared to a big investment made later in life.
You stand to gain much more if you invest a smaller sum of money now and stay invested for a longer period of time than waiting until you have a bigger amount of money to invest later. Therefore, it makes sense for you to start investing as soon as you can afford, and as early as you can. To illustrate, say you invest $10,000 at 12% returns compounding annually. At the end of 10 years, you'll have about $31,100. At the end of 20 years, you'll get $96,500. If you stay invested and take out the money at the end of 30 years, you'll gain close to $300,000!
Let’s look at another example…
Assuming 2 friends, John and Mary, both invested their money that yields 10% returns per year. John started investing an annual sum of $1,000 at 18 years old for 10 years till the age of 27 (total investment of $10,000). John intends to stay invested until he reaches 65 years old before taking out the funds for his retirement. Mary started investing later at the age of 28, putting $1,000 annually for 38 years till the age of 65 (total investment of $38,000) so she could have the funds for retirement. When both John and Mary reach 65 years old, who do you think will have more money for retirement?
Now, remember the total amount of money invested by John and Mary are $10,000 and $38,000 respectively? We can see that Mary actually invested 3.8 times more money than John. However, John will eventually get a profit of $646,000 while Mary will only get about $362,000. John would benefit more from compounding as he stays invested longer. That’s $284,000 more even though Mary's investment capital is $28,000 more than John!
I’m sure from the above examples, you’ll realize the importance of investing your money early. Eager to start? Read Five Factors to Consider Before You Start Investing too.
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