What I wish I had learned 10 years ago about Investing!
Put simply, if you want to know what the number one thing that I have learnt the most since undertaking my studies as a Financial Planner at university is that the best time to invest was 20 years ago, the next best time is TODAY!
A lot of people have used the planting of a tree analogy, where if you want a tree to grow to maturity, the best time to plant it would have been 10, 15 or 20 years ago, the same is for investing. Which is due to one of the most powerful tools you need to have if you want to set yourself up for the future and finally break from financial stress and worry.
The mathematical concept and the greatest wealth creator of all time comes down to one simple concept…
Compound growth and compound interest!
I touched on this a little bit in my earlier article, “What is investing?” However, I want you to truly understand the power of compounding when it comes to investing, because it truly is the game-changer.
Firstly, what is compound growth/interest?
“Compound, to savers and investors, means the ability of a sum of money to grow exponentially over time by the repeated addition of earnings to the principal invested. Each round of earnings adds to the principal that yields the next round of earnings” - Investopedia.com (1)
I daresay, this definition is great, however its best to truly understand compounding by going through a real-life example. I am going to use two people and two different scenarios, one started investing/saving at the age of 18 years old, one started investing 10 years later at the age of 28 years old.
I love graphs, I am a bit of a visual person and it was not until I actually started playing around with some compound interest calculators that I started really understanding what I had missed out on over the past 10 years…
Let’s have a quick look at the two scenarios in the graph below; (2)
Two scenarios of investing, whereby one investor started at age 18 years old, the other started at the age of 28 years. They invested for 32 years and put in $100 regularly every month for 32 years.
Based on the graph above, which is using a pretty conservative 7% annual return over 32 years, (Australian shares on average returned 8.8 per cent annually over 20 years to December 2017) (3) we can see that starting investing 10 years earlier makes a huge difference on the compounding effect.
You can see illustrated in the graph that person 1, who started investing in the share market at 18 years old with an initial deposit of $10,000 and depositing $100 monthly until the age of 45 years old, has been able to accrue $219,414 by the end of the 32 years.
On the other hand, person 2, who started 10 years later, has only been able to accrue $103,111 by the same age of 45 years old.
That is an astounding $116,303 difference…
And here is the rub, the 18 year old person only had to invest $48,400 over the 32 years that they invested, working out to be a measly $1,512 per year. Whereas, person 2, who started at 28 years old, had to invest $36,400, working out to be $1,654 per year over 22 years.
For an extra $12,000 invested from person 1, they were able to get an additional return of $104,303 overall.
I know who I would rather be…
That is just one scenario between two hypothetical people, however imagine if you had started investing when you were 18 years old, I wish I had. However, I started at age 25 years old and I probably lost out on nearly $100,000, but that is ok, I am alright with that, because the teacher does not appear until the student is ready to listen/learn.
I just hope that I can appear in time for you to take action and start investing TODAY, so that you don’t make the mistake of losing out on all those returns that myself and person 2 would have lost.
Going back to the tree analogy, the best time to plant a tree was 20 years ago, but the next best time is right NOW!
So go out and…
Take Back Control
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