Wishing everyone to have a wonderful and prosperous year 2013, would like to share this post to take important resolution in this New Year Day, especially for young readers.
Start investing early, this is the advice all financial planners suggest today. But, why need to start investing when you are young. This is because of the Compounding power of money. Absolutely there is a difference who starts investing at the age of 18 and who start investing at 28. If you start investing at 18, you will get financial freedom soon and get retired young with adequate wealth.
The power of compounding can be better explained with an example for easy understanding. Let’s take two friends John and Robert. Both are at 18, John learned the power of compounding and started investing $ 5000 a year from the savings he made from his part time job. He knows the value of investing, so he invested in quality stocks rather than saving money in bank account. Assuming 15 % return on this investment, he accumulated around $ 101,500 in 10 years. After this, he stopped investing, but he didn’t touched the money accumulated so far and let it fetch the return of 15 % per year till the age of 55. His investment grows around $ 4,400,000, though he stopped investing after initial 10 years. This is the huge money which is more than enough for his decent retirement.
The other friend Robert, who didn’t aware of investing and compounding power of money, enjoyed during his teens and spent all his money which he could save and invest. All of sudden he realized the importance of money and investing at the age of 28, so he started investing where our other guy John actually stopped investing. Robert managed to invest $ 10,000 per year till the age of 55 assuming the same return of 15 % per year. At the age of 55, he accumulated around $ 2,850,000 which is almost half of the wealth John created. Though, he invested $ 10,000, double the amount John invested per year and keep investing for 22 years till he reach 55, Robert can accumulate only half of the wealth John created with the investment of 10 years.
Here, the difference is, John started 10 years earlier, but Robert didn’t. This is the power of compounding and investing over a period of time. Hope you all could understand the importance of investment early in life by this small illustration.