Time is your power, especially while you’re young. Recall compound growth as a driving force for ever-increasing gains. Adding more growth cycles before you quit is not just adding more growth on what you already invested, but also more growth on the growth you got. Let’s apply this concept to your financial situation.
Starting at the end, ‘I quit’ is equal to ‘I retire and I need my investments to live off now’ and we assume this to be at 65 years old. A growth cycle will be a year in our case. We’ll assume an annual 6% return on investment for every scenario. We disregard inflation for proving this concept, consider it somewhat included in the annual return rate if you’d like. We consider different scenarios for three people with a different background: Privileged Peter has the knowledge of investing early, Unprivileged Uma got to know investing later in life and Stubborn Sebastian refuses to invest. Peter is 20 years old, Uma is 40 and Sebastian is also 20. Let’s compare their final results and process to get there. Hopefully, these scenarios will convince you to start investing early, no excuses.
Scenario 1. Peter, Uma and Sebastian all inherit €10.000 from their grandparents. With 45 years to grow, Peter will own €137.646. With 25 years to grow, Uma will own €42.919. Peter could even consider investing only €3.250 and still end up owning little more than Uma, while having €6.750 to feast however he likes. Sebastian ends up at the bottom. With 45 years of non-growth, he still owns €10.000.
Scenario 2. Peter, Uma and Sebastian all have €0 to their name. They all want to own €1.000.000 by retirement. How much do they need to start investing monthly to reach their goal? With 45 years to contribute and grow, Peter will need to contribute €400 monthly until retirement. Peter has contributed €216.000 himself and the other €784.000 is capital growth. With 25 years to contribute and grow, Uma will need to contribute €1600 monthly until retirement. Uma has contributed €480.000 herself and the other €520.000 is capital growth. Not only does Peter have to contribute a total that is half of Uma’s, he’s also making it easier on himself by making the monthly payments rather low throughout his life. The only downside is that Uma has 20 years more to spend an extra €200 per month, but that comes with a cost. If Peter matches Uma’s madman contribution, he would end up with €4.000.000. With 45 years to contribute, Sebastian will need to contribute €1.850 monthly to his savings until retirement. If he contributes only €400 monthly like Peter, he ends up with €216.000. All of his worth is contributed by himself, none of it through capital growth.
These scenarios are just here to show you that investing early is worth it. It is worth it in the sense that you get more bang or growth for your individual buck. It is worth it in the sense that it puts less pressure on you and your finances later in life. You’re just chilling on your stable well-being train while others are desperately running besides it trying to catch up and hop on. They could’ve simply entered while the train was standing still at the station. The thing with investing is that the best station to hop in was always yesterday, the second-best is right now.
Strive to be a Peter and happily continue your pace, don’t stress out if you’re an Uma but start now, and work on yourself if you’re a Sebastian. Don’t take these scenarios as literal examples of what you should do. You should plug in your own numbers for expected interest rate, preferred retirement age, preferred retirement amount and other factors. You can find a ‘compound interest calculator’ that helps you out with the numbers, there are many of them.