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BY ANGELINA YAO

DON’T wait to start saving and investing. DO start now, no matter how little.

When it comes to investing and saving, starting early is everything. Thinking you can or should wait is a big mistake. Every year you wait puts a huge dent in your long-term financial plans.

To show you what I mean, let’s take Carrie Bradshaw and her friend Miranda Hobbes from the show "Sex and the City". As I mentioned in another post, Carrie put all her hard-earned money into her wardrobe instead of putting some of it into savings and investments.

Let’s say Carrie decided to plan for her future when she turned 35 and waited until then to start investing for her retirement. Let’s say her best friend Miranda invested even a relatively modest portion of her lawyer income in her twenties before she left that job in her thirties. Here’s how their investment accounts might compare:

Figure

You read those numbers right. They’re not typos.

Miranda invests $100/month between the ages of 25 and 35. She never adds to her investment. Carrie waits to start investing until she turns 35, then invests $100 every month for 30 years.

Miranda actually puts in a whole lot less money up front than Carrie, but still ends up with about $185,895 more when she’s ready to retire, and that’s at an 8 percent rate of return on investment. The difference is more pronounced if the rate of return rises to 10 percent. In the Heels & Yield workshops or our book The Roadmap to Holistic Wealth, you’ll learn more details about how compounding actually works.

“It’s less about how much you invest and more about how long. Miranda’s 10-year head start gives her a tremendous advantage over Carrie, regardless of the fact that she invests less overall.”
It pays to start early

This example illustrates the power of compound interest. It’s less about how much you invest and more about how long. Miranda’s 10-year head start gives her a tremendous advantage over Carrie, regardless of the fact that she invests less overall.

Even if you don’t have $100/month to invest, you can start small. How about $20/month?

One quick note: when it comes to investing, nobody can guarantee returns. If anyone says they can you should probably run the other way as fast as you can. We used the 8 and 10 percent rates here for the purposes of illustration.

Some insurance products with an income savings scheme offer a guaranteed return but you eventually pay additionally for this guarantee in some way. Make sure you read the fine print!

When you invest, you have to believe that the market will, over the long run, continue to grow and recover from the inevitable downturns. This means you’ll need to be ready financially and emotionally to weather the storms in the market, like recessions, and not withdraw your money at the first sign of a drop.

The key to using compounding to your advantage over the long term is to start investing early and keep investing through market ups and downs.

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Disclaimer
This blog and its contents were created by Heels & Yield Limited. Our blog and its contents are for general guidance and informational purposes only and should not be treated as legal, accounting, financial, investment or tax advice. For specific questions related to your financial, legal or tax situation, please consult your own attorney, accountant, and/or independent financial advisor for expert advice and carefully consider all relevant risk factors. Heels & Yield Limited is a financial education company and not a financial advisory firm or a law firm or a certified public accounting firm. Please visit our website for full terms of our disclaimer and terms conditions of use. Please read our full disclaimer here.

3 thoughts on “Compound Interest: A Girl’s Best Friend”

  1. Krizia says:

    That is a powerful illustration of how starting and planning ahead earlier yields greater returns. If only more women in careers or at home were made more aware of this. Heels & Yield, this would be your mission!

  2. Ivy says:

    What a helpful tip! Great reminder to start investing early!

  3. Yuni says:

    Can’t agree more! Don’t wait to find a perfect opportunity to start investing – having a diversified long-term portfolio from early on is the simpliest and best solution for most people

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