The Earlier You Begin the Better

Education

Saxo Group

Did you ever notice that you didn’t learn how to drive a car until you actually attempted to drive a car and that you didn’t learn another language until you started the process of learning another language? It takes less time to learn to drive a car than it does to learn another language, but in both cases, you get better and better over time as you put forth the effort to make improvements. Someone who has studied another language for five years might be perfectly fluent, but someone who has studied for decades will have an even better understanding of the subtle nuances and obscure vocabulary of that language.

Investing works the same way

It’s pretty simple, but the earlier you begin investing, the earlier you’ll start to grow your wealth. The more time you spend investing and actually being invested the more likely it is you’ll have the positive wealth growing outcomes you desire.

The power of compounding

The more money you have the more your investment will grow. The more time you have being invested the more your investment will grow. This is compounding. How does it work?

The more money you have – compounding part one

Let’s say you have an investment that earns a five percent return over the course of one year. If you invest \$1.00 you will earn \$0.05, but if you invest \$10,000 you will earn \$500. Both investments earned five percent, but \$500 is considerably more than \$0.05.

The more time you have – compounding part two

After the first year your \$10,000 grew to \$10,500. The second year this will grow by \$525 to \$11,025, a growth increase of \$25. By year five your investment will grow by \$607.75. By year ten your investment will grow by \$775.66. By year twenty it will grow by \$1,263.48. Each year your wealth is growing by 5%, but the dollar amounts are larger over time.

See mathematical aside*.

Warren Buffett

Warren Buffett, the “Oracle of Omaha” is the chairman and CEO of Berkshire Hathaway and is widely considered one of the best investors of all time. Take a look at the chart of his wealth over time.

A couple of things are striking. One, he has a tremendous amount of wealth, so it’s no wonder he is considered such a good investor. Two, he started very young. At the age of 14 he had \$5000 in wealth. Many people could have done the same thing, but didn’t. They waited. If he would have waited to start until he was 30 years old it would have cost him around \$50 billion. \$50 BILLION! Start investing as soon as you possibly can.

Overly simple

The growth and compounding example in this article is overly simple to make a point. Time and compounding are your friend. In reality, investments rarely go straight up year after year. You will see this if you look at Warren Buffett’s wealth chart; there have been times when his wealth has gone down considerably. There are ways to diversify and reduce the ups and downs in your wealth.

Mathematical aside*

Growth at 5%

Growth = Beginning Wealth * 0.05

Ending Wealth = Beginning Wealth + Growth

 Year Beginning Wealth Growth Ending Wealth 1 10,000.00 500.00 10,500.00 2 10,500.00 525.00 11,025.00 3 11,025.00 551.25 11,576.25 4 11,576.25 578.81 12,155.06 5 12,155.06 607.75 12,762.82 10 16,288.95 775.66 17,064.61 20 26,532.98 1,263.48 27,796.46 40 70,399.89 3,352.38 73,752.27

*We work hard to make these articles as approachable and math-free as possible. At the same time, if a little math makes the article easier to understand, we’ll go ahead and do that too.

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