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:
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.
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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To learn more about compounding interest, join our workshops.