Don’t Wait, Start Investing Today!
- Compound interest is how the rich stay rich.
- Starting your investing journey early is key to success.
- There is no special talent required to build considerable wealth.
Start Investing At A Young Age
Billionaire investor Warren Buffett has some sage advice for young people, “Start early. I started building this little snowball at the top of a very long hill. The trick to have a very long hill is either starting very young or living to be very old.”
None of us can control where our hill will end, but we can control where it begins. One of the motivations behind my starting The Hindsight Investor was because I learned this too late. Or later than I would have preferred; I don’t want you to do the same.
Compound Interest
When Mr. Buffett says, “start early”, he means investing in the stock market. There is no greater avenue to build wealth than the stock market. And time in the market is the primary factor determining overall return on investment. This is because of compound interest – the 8th wonder of the world.
Historically, the S&P 500 index returns approximately 7% to 10% annually. So, if you invested $100 in the S&P 500 index today (here are some options), it’d probably be worth between $107 and $110 a year from now. But 2 years from today, that same $100 would be worth somewhere between $117 and $121. This is due to the power of compounding.
As time passes, interest “compounds” upon itself. Meaning in year 1, the 10% was gained from the initial $100 investment ($100 x 10% = $10, $100 + $10 = $110). But for year 2, the interest builds upon year 1’s ending balance of $110 ($110 x 10% = $21, $110 + $21 = $121). So, after 5 years your $100 investment would be worth between $131 and $146 and you didn’t do a thing (Exhibit 1).
Take a look at Exhibit 2. If history repeats itself and returns somewhere between 7-10% annually, you would be a millionaire within 47 years if investing only $100 per month. And $100 per month isn’t a lot of money. Also, notice how your investment grows exponentially over time.
Let’s take another example. Exhibit 3 shows the result if you were to increase your annual contribution by 5% each year. So, in year 1 you contribute $100 per month ($1200 per year) and in year 2 you contribute $105 per month ($1260 per year). In this example, you’re a millionaire within 40 years and worth $10M in 65 years.
A Simple Recipe For Success
My friends, this is how the rich stay rich. No tricks, no special talent, no secret recipe. Simply start investing early in your life, re-invest consistently, and watch your wealth build.
A few tips before diving into the market
- Be sure to build a 6-12 month emergency fund prior to investing. Only invest funds you won’t need in the near future.
- Know that the market does not consistently increase 7-10% each year. In fact, it rarely returns 7-10% in any given year, but it averages that amount over time (Exhibit 4 shows S&P 500 annual returns from 1995-2021).
- Temperament is important. There will be bull (increasing) and bear (decreasing) markets, so you need to keep your emotions in check. It’s easy to stay invested when the bull is running, but not so much when the bear strikes. Keep your cool, don’t panic, and be steadfast, but don’t sell unless you absolutely need the money now.
I promise – when you look back at your life 20, 30, or 40 years from now, you won’t regret having started your investing journey early….and neither will your heirs!
