“The art is not in making money, but in keeping it.”
— Anonymous
"I am young, I don't want to think about money now."
“I’ll just enjoy my life. I’ll think about money later when I get married or after having kids.”
“I can buy the stuff I want with credit cards. I can pay later when I have money.”
You likely recognize these statements. I’ve heard many of my friends and colleagues say these things including myself. In this post, I would like to make the point of starting early.
You can still do the things you like to do, but if you make small changes now — you can achieve significant results later.
The power of starting early is the most underestimated concept in investing. But, its value is insignificant. I’d consider it to be the most powerful force in investing. It is so powerful that I think it should be taught as a mandatory subject in school for everyone.
Most people think that investing is for rich people and only rich people can become richer.
But, I argue that young people are rich — they have time on their side which is invaluable. They are rich in time which makes them rich in money later if they know how to use it.
Guessing Game
Can’t believe me? Let’s play a guessing game.
(This example was inspired by the book ‘Slight Edge’ by Jeff Olson).
Let’s say your best friend and you are both 24 years old. You both have come across stock investing and realized that you should invest to get rich. You both come up with a goal of retiring with a million dollars at age 65.
Your friend is a little proactive and starts investing 2,000$ per year right away. He adds it into a Roth IRA which yields 12% per annum.
You procrastinate and get busy with life. You wait. You forget about it.
When you meet your friend at age 30 and ask how his Roth IRA is doing, your friend says that his investing goal is finished and he will become a millionaire at age 65. He’s all set.
Since you haven’t invested a single penny, you freak out and start investing the same $2,000 every year from age 30.
To recap:
Your friend starts investing $2,000/year from age 24 until age 30.
You freak out and start investing the same $2,000/year from age 30.
Now, here’s the guessing game —
Can you guess how many years you have to invest to end up with the same money at age 65?
In other words, by what age will you be able to stop investing your annual $2,000, as your friend did at age 30?
.
.
After 6 years?
.
.
No.
.
.
After 10 years?
.
.
No.
.
.
After 15 years?
.
.
No.
.
.
After 20 years?
.
.
No.
.
.
I couldn’t believe my eyes when I first saw the answer. You have to invest for…
.
.
.
.
33 years.
Yes. You have to invest for 33 years (until age 62) so that you can catch up with your friend at age 65.
Your six years of procrastination have cost you 33 years just to catch up.
It not only costs you time but also money. Your friend invested 12,000 total from age 24 until 30 ($2,000/yr * 6 yrs) whereas you invested 66,000$ total from age 30 to 62 ($2,000/yr * 33 yrs).
Your 6 years of procrastination have also cost you 54,000$ more just to catch up.
Isn’t that mind-blowing? Here’s the summary in a table:
| Your friend | you | |
|---|---|---|
| Starts investing at age | 24 | 30 |
| Invests $2,000 every year for… | 6 yrs (24 to 29) | 33 yrs (30 to 62) |
| At age 65, with 12% return, portfolio is worth… | $1,074,968 | $1,077,639 |
| Total amount contributed | $12,000 | $66,000 |
| % of contribution to the final portfolio | 1.1% | 6.1% |
“Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time. “
— Johann Wolfgang Von Goethe
It’s easy to underestimate the amount of time you have when you’re young. If you’re in your 20s and 30s, you’re considered to be one of the luckiest people in investing. You’re ought to become rich if you take action now.
Even if you can make small contributions, start now. Small actions lead to massive results over time. That’s the nature of compounding.
Don’t get discouraged if you’re in your 40s, 50s or even 60s. It is never too late to start investing.
“The best time to plant a tree was 20 years ago. The second best time is now.”
— Chinese Proverb
Key Takeaway:
Don’t underestimate the power of starting early. Start investing now. It is never too early or too late to start investing. Take action!
If you’re interested in my investment philosophy, check out this article.