Why Invest Early? Here’s Why
As the saying goes, “Time is money.” But is it really?
Think about this: Albert Einstein once said, “The power of compound interest is the most powerful force in the universe.”
Time is an investor’s friend, especially when it comes to investing. Over time, compounded returns from the stock market may grow exponentially. Compounded returns are the cumulative effect of investment gains over time. A hypothetical illustration of a 40 year investment period may help demonstrate the power of time and compounded returns.
The chart below depicts three scenarios of three investors. Let’s call them Robert, Mark and Sarah. Robert invests $100 every week starting at the age of 25, Mark invests $100 every week starting at the age of 35 and Sarah invests $100 every week starting at the age of 25 but increases her contributions by 4% every year.
Let’s assume all three will earn an annual rate of return of 8%, roughly in line with the 20 year annualized return of the S&P 500. Robert’s portfolio may have grown to nearly $1.5 million over 40 years, while Mark’s portfolio may grow to only around $641,000 in 30 years. However Sarah’s portfolio may grow to $2.4 million over 40 years.
By starting to invest at an earlier age, Robert’s investment may grow to over 2 times that of Robert’s. While Sarah’s portfolio grew to nearly 4 times that of Mark’s as he started early, like Robert, but Sarah also increased her contribution every year by 4%.
Total Invested vs. Return on Investment
The chart below depicts very different potential investment return outcomes for Robert, Mark and Sarah:
At the end of 40 years, Sarah’s return on investment may grow to just over $1.8 million with an investment of just over $519,000. Robert’s return on investment may grow to just over $1.2 Million with an investment of just over $213,000. However, Mark’s return on investment would be worth only $480,000, despite investing nearly as much as Robert, over $160,000. Why such a large disparity? Robert and Sarah started investing 10 years earlier than Mark. This underscores the power of time and compounding.
So what did we learn? By starting to invest early like Robert and Sarah, investors may have additional time for their money to compound. This could mean, more return on money invested. Even for smaller investors, an early start can make a big difference. So, why start early? This is why. Time Is Money.
The above charts and tables are for informational purposes only. It is impossible to predict future growth and actual results may vary.
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