Section II - Lesson 3
Investing Basics - Early Money Earns The Most
For maximizing your results, the most important variable in the compound interest equation is the variable of time. How soon you start to save money is much more important than how much you may be able to put away once you start.
This is because early money earns the most of any money, which is what compounding is really all about. It’s much more important to start immediately with even a few dollars a month, than to wait until you can save a more meaningful amount.
Most of you would not be surprised when we point out that the sooner you start your investment plan, the more money you'll accumulate by retirement age. This would seem to be simple mathematics - the longer you save, the more you'll save. But many of you may be surprised by the amount of this difference.
An individual saving 12% of a $36,000 salary with a 3% company match would attain the following results by age 65 depending on his age when he started.
Age 29 .....$2,679,994
Age 32 .....$1,953,108
Age 35 .....$1,416,738
Age 38 .....$1,021,402
Age 41 .....$ 730,439
As you can see, there's more going on here than simple mathematics. There's a compounding effect of money earning money on the money that earned money on the money, etc., with the result that "early money" earns much more than money put in later during the time period.
A 29 year old individual would cost himself almost three-quarters of a million dollars by waiting 3 years to start his program.
A 32 year old individual would cost himself a half-million by waiting 3 years.
And the difference between starting at 29 or starting at 41 is nearly two million dollars.
Another point needs to be made here as well. Your investment program is not going to stop at age 65 or 70 or any other pre-determined age, just because you decide to retire.
You may stop making additional contributions after you retire, but your accumulated balance is going to continue to grow, and possibly even grow at a faster rate than you can take it out.
So add another 20 years or so of compounding to the results shown above, and you’ll see even more clearly the importance of starting immediately.
“Early money” will have an extra 20 years to earn!
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