Financial Foundations: Start Investing Early
Hi! I’m Nick, and welcome to Financial Foundations. I’m going to cover several concepts of investing that may seem confusing and show you that they’re actually simpler than you think. Let’s talk about why you should start investing early.
I’m going to tell you about a pair of twins. Let’s say their names are Nicholas and Nicole. Both Nicholas and Nicole want to start investing, but they go about it differently.
Nicholas starts investing when he turns 22 years old and saves $500 each month for 8.5 years, so until he’s 31. After that, he stops saving additional money. In total over that period of time, he saves $51,000.
Now, let’s assume that Nicholas earns an average annual return of 8% on his investment. So, by the time he turns 65, Nicholas can expect his money to grow to $1,025,000.
Now, his twin sister Nicole decides to hold off on investing until she turns 31 years old, 8.5 after Nicholas starts investing. Like Nicholas, she also saves $500 a month of her own money, but she plans to do this for the next 34 years until she turns 65. Over that period of time, she saves a total of $204,000 of her own money.
Now, assuming that Nicole also earns an average annual return of 8% on her investment, she too can expect her money to grow to $1,025,000 by the time she’s 65.
Wait a minute! Both Nicholas and Nicole have the same amount of money by the time they’re 65?! How can that be?! Didn’t Nicole save 4 times that amount of money that Nicholas did? Yes, but because she wait 8.5 years to start investing, she lost out on the power of compounding during those important early years.
Because he started investing early, Nicholas only had to save a fraction of what Nicole did in order to earn the same million dollars by the time they were 65. So, maybe you should reconsider when you start investing your money, huh?
There you go! You now know why you should start investing early. I’m Nick and thanks for joining me on Financial Foundations. See you next time!