Many people today seem to want to live in the present and leave saving for retirement for the future. Unfortunately, delaying proactive investing creates an environment where you’ll have to swim upstream. The reason for this? Compound interest.
Compound interest is the interest that not only accumulates on your investment, but on the accrued interest over time as well. As a hypothetical example, if on day 1 you put $100 into an investment and 1 year later you had a 10% return on your investment, your account would then be worth $110. If year 2 also presented a 10% return on your investment, your account would then be worth $121, as 10% of $110 is $11. Over the course of several years, the amount of interest gain on the same interest rate will increase, thus allowing the use of a snowball effect with investments to allow proper accumulation over time.
This snowball effect is the primary reason for starting early. Otherwise, you will be playing catch up and more than likely, will never quite catch up.
In another example, take a 22-year-old recent graduate who started working and deferring money into the company 401(k), as well as into several outside investments. At $1,500/month for 20 years with a 7% return on investment over that time period, the portfolio would be valued at $2,855,513.15 when the individual turns 62. Take a 32-year-old who waited to proactively invest but invested $1,500/month for 30 years, with a 7% return on investment over that time. The portfolio would then be valued at $1,700,294.15 when they turn 62. That’s a difference of $1,155,219—and the 22-year-old put in $216,000 LESS than the 32-year-old.
There are many ways to start and sustain investing for the long term. Depending on your specific financial situation, certain strategies may be more efficient and effective than others. Overall, it’s important that you invest early and often in life, so that you don’t get behind the game and the power of compounding interest.
Written by Garret J. Colao, Financial Advisor
These are hypothetical examples for illustrative purposes only and are not based on any particular investment. Assumes 10% and 7% annual return respectively. Investments will fluctuate and when redeemed, may be worth more or less than originally invested. The examples do not account for fees and expenses associated with investing
This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. 2141182/DOFU 6-2018