The power of investing early cannot be overstated.
When we finally start appreciating financial wisdom, it’s usually when we are already past our investing prime. That doesn’t mean we’re too late to make our money work for us, but it does mean we’re internally kicking ourselves for not starting sooner. If there is ever a time we ruefully look back on our teen years saying “if I only knew then what I know now,” it’s when we’re looking at our long-term investing.
The truth is, compound interest can easily make a millionaire out of even the most unsophisticated investor – so long as time is on your side. Which is why once we finally realize how much money we missed out on, we should really try to make sure our kids don’t make the same mistake of letting “free money” pass them by.
But talk to a teen about the benefits of compound interest and their eyes will probably glaze over faster than you can imagine. Discussing the slow and steady of long-term investing likely won’t go over well with the fast and impulsive teenage mind. Talking about how to become a millionaire, however? That might get their attention.
Say you’re 16 and you start your first high school job. Instead of blowing all your money, you decide to set aside $100 a week for retirement. You get into the habit of it, and you start to invest $400 a month. I know, it’s a stretch for a teenager, but let’s say you really buckle down and commit to that $400 a month for a whole 10 years. (Or, let’s say you save $200 a month, and mom and dad match it, for a total of $400 invested per month.) Either way, over 10 years, you’ve invested a grand total of $48,000.
It’s really not that much, right? Well, it’s enough to help make you a millionaire.
If you’re averaging a 7.387 percent (the average S&P 500 return rate, adjusted for inflation), you’ll likely have about $70,000 already by the time you turn 26, a huge leap from your original investment. Then let the magic of time plus compound interest do their work, and that initial $48,000 can easily turn into a million dollars by the time you reach age 65.
That’s a lot of dough for a little bit of investing. But perhaps what’s even more convincing is seeing what happens when you decide to wait.
Say instead you decide to forgo those first ten years of investing, and instead put that $400 a month away starting at age 26. Over those 39 years, you end up investing over $187,000. You’ve put in nearly four times as much cash, so you should wind up with more at retirement, right?
Despite investing much more in the long run, you would wind up with less, over $100,000 less, all because you missed out on those crucial early years of investing.
That’s the beauty (and pain) of compound interest – if you give it enough time it will do the heavy lifting for you. If you don’t, you’ll be robbing yourself of an easy millionaire status, or working really hard to play catch-up. I know if I had understood the impact of compound interest as a teen, I’d be well on my way to being a millionaire right now without having to raise a finger.
Don’t believe it? Take a look for yourself using an online compound interest calculator. You can adjust the rate of return, play around with the amount and time you want to invest, and see for yourself that the early bird really does get the worm – especially when it comes to long-term investing.