The Power of Compounding... Investing Early

When should we start saving money for our retirement? And when should we start investing? The general idea is to start sooner rather than later. There are several advantages of starting early. The earlier you begin to invest the more time your money has to grow and serve for you. Also, by making consistent contributions (see Dollar Cost Averaging) we can budget our expenses more easily and put the power of compounding work for us.

Compounding lets us earn money not only on our investment but also on the returns that our investment has generated. Investing early allows us to magnify the effect of compounding dramatically. Hear is an example. 

Suppose there are two investors Mr. Early and Mr. Delay both have the same age, income and lifestyle and both want to retire 40 years from now. Mr. Delay thinks that it’s too early for him to think about retirement savings, while Mr. Early started investing $1,000 every year and earned an average annual return of 12%. After 10 years Mr. Early stopped investing new money in his retirement portfolio. At that same time, Mr. Delay started his retirement plan and started investing the same amount of $1,000 every year and also earned 12% each year in his retirement plan and continued his contributions until he retires. At the time of their retirement the total contribution made by Mr. Early was $10,000 and by Mr. Delay was $30,000.

When they retire Mr. Delay ends up with $241,333 and Mr. Early has $525,759! In spite of investing three times more money in his retirement plan Mr. Delay has less than half the money as Mr. Early to enjoy his retirement.

	Mr Early	Mr. Delay
Total Investment	$  10,000	$30,000
Year 1	$     1,000	$         -
Year 2	$     1,000	$         -
Year 3	$     1,000	$         -
Year 4	$     1,000	$         -
Year 5	$     1,000	$         -
Year 6	$     1,000	$         -
Year 7	$     1,000	$         -
Year 8	$     1,000	$         -
Year 9	$     1,000	$         -
Year 10	$     1,000	$         -
Year 11	$          -	$    1,000
Year 12	$          -	$    1,000
Year 13	$          -	$    1,000
Year 14	$          -	$    1,000
Year 15	$          -	$    1,000
Year 16	$          -	$    1,000
Year 17	$          -	$    1,000
Year 18	$          -	$    1,000
Year 19	$          -	$    1,000
Year 20	$          -	$    1,000
Year 21	$          -	$    1,000
Year 22	$          -	$    1,000
Year 23	$          -	$    1,000
Year 24	$          -	$    1,000
Year 25	$          -	$    1,000
Year 26	$          -	$    1,000
Year 27	$          -	$    1,000
Year 28	$          -	$    1,000
Year 29	$          -	$    1,000
Year 30	$          -	$    1,000
Year 31	$          -	$    1,000
Year 32	$          -	$    1,000
Year 33	$          -	$    1,000
Year 34	$          -	$    1,000
Year 35	$          -	$    1,000
Year 36	$          -	$    1,000
Year 37	$          -	$    1,000
Year 38	$          -	$    1,000
Year 39	$          -	$    1,000
Year 40	$          -	$    1,000
Money at
Retirement	$525,759	$241,333

The conclusion is rather simple.  Start investing early and let the power of compounding work for you. The best time to start investing is ten years ago, the next best time is today.  Even if you invest a very small amount right now, you may end up better off than if you wait and invest a larger amount sometime in the future.

Investing has its risks and rewards, so talk with one of us to determine what investment strategy is right for you.

 

Investing in stocks are not guaranteed and can lose value.  Losses, as well as gains, may occur when investing in marketable securities.  Talk with a financial consultant for more information.

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