I’m sure you’ve heard it before, you need to start investing for your future.
You’ve probably heard it so many times that you just tune it out now. Because of this, I’m not going to tell you that you need to start investing, I am going to show you why you need to start investing now.
The sooner you start investing, the sooner you take advantage of time and compound interest. How do these work in your favor? First we have to understand compound interest, and then we can talk about time.
What Is Compound Interest
Compound interest is when your money grows upon itself. For example, if you have $100 in a savings account and you earn 10% interest during the year, you will end the year with $110. You earned $10 worth of interest.
The next year, you still earn that same 10% interest, but you don’t earn $10 again, you earn $11 in interest. That extra $1 you earned is because of compound interest. Your money and the interest you earned is compounding upon itself. This can be seen in the chart below.
As you look at year 6 in the chart above, you see that all of this compounding has led to you earning $16.11 in interest. Now, some of you might be thinking, “$16 isn’t going to pay for much. I still don’t see why I need to start investing now.” This is totally understandable. Let’s look at a more example, a common investing scenario.
Let’s say you have $150,000 in your 401k and it is returning 8% annually. The chart below shows you how much your account grows in 6 years.
During year 6, you earned a little more than $17,500 in interest! That has to get you excited. But again, some might mention the fact that they don’t have $150,000 in their retirement account, so the example doesn’t apply to them.
Compound Interest And Time
This is where time comes into play. The longer your time horizon, meaning the longer time you have to invest, the more compound interest can work its magic. Let’s look at one more example with the following facts:
- Current Age: 25
- Current Salary: $40,000
- Current 401k Balance: $20
- Amount To Contribute: $76.92 per paycheck (assuming bi-weekly pay) or $2,000 annually (5% of your pay)
- Annual Raise: 3%
- Planned Retirement Age: 65
- Annual Rate of Return: 8%
- Employer Match: 50% on the first 3% you contribute
Over the course of the next 40 years, you are going to contribute $155,327 into your 401k plan – and note you are starting just $20. Your employer is going to contribute an additional $46,598. That comes to a total balance of $201,925.
But, we haven’t factored in your annual return yet. When all is said and done, your measly $76.92 from your paycheck every other week grows to….$1,001,602. That’s not a typo. You have a million dollars for retirement.
What happens if you can find a way to save $153.85 from each paycheck? That is 10% of you salary. If you would do this, you would end up with $1,771,723, Close to $2 million!
So if you can make that much money investing, why do you need to start now? Because of time. If we go back to the original example above where you end up with $1,001,602 and instead of you starting at age 25, you start at age 35, you will end up with $414,247.
That isn’t even half the value as before and you only waited 10 years to start! See below for the results if you wait even longer.
There is a huge drop off in the account value the later you start investing. This is why you need to start investing now. The later you start, the less time and compound interest can work their magic. The only way to overcome this is by investing a lot more money from your paycheck later in life. Sadly, this rarely happens, which is why so many people are realizing they are going to have a tough time affording retirement.
Money is a huge stress in many people’s lives. You can take control and eliminate some of this stress from your life. You do this by starting to invest now, not tomorrow. Every day you put off investing, is one less day that you can take part in the beauty of compound interest. As I have shown above, waiting can cost you a fortune.
You may not think what you are saving each week is going to add up to much, but I am here to tell you otherwise. I started off investing $20 per paycheck into my 401k at work. After a year I had a little more than $500. I thought it would never amount to anything more. Boy was I wrong. Time and compounding did their thing and I have gone along for the ride. When I look at my balance now, I think back to that original $20 and smile, realizing how much of a difference it really made. I urge you to start investing now. You won’t regret it.