Disclaimer: The examples used in this post are for educational purposes only. The statistics and numbers that are used here do not take into account inflation or taxes which can drastically affect performance over time. Investing is inherently risky and past performance does not indicate future performance.

Make Time Work For You

Einstein is often quoted as saying that compounding interest is the eighth wonder of the world. Take a lesson from arguably one of the greatest minds of all time, and learn to harness this wonder. Let compounding interest help you on your journey to achieve your dreams.

Had I known sooner about this magic this thing called “compounding interest,” I would have started putting away a few dollars here and there when I was pushing carts or scooping ice cream in high school. Sure it wouldn’t have been a whole ton of money, but in a little bit we’ll see why a small amount of money when you are young can add up to a lot of money when you’re older.

Basically, compounding interest means that your money acts as a little employee for you. He earns money over time without you having to do much work at all. The magic starts because the little bit of money that your little employee earned you, also goes to work and starts earning you money.

Another way to visualize what is happening is imagine that you are planting trees. Each dollar that you invest is like a little seed. Over time the seeds are going to grow into a mature tree which will drop seeds of its own, growing into even more trees. By planting seeds at a regular schedule, one day you’ll wake up in a forest which will produce fruit enough to live on.

Imagine sitting on a beach, hiking a mountain, and traveling the world. Imagine never having to set an alarm again if you don’t want to and not having to rush to work every day. By letting time and money work for you, you can free up your own time to do the things that you love. Getting Rich Young is about getting to this place of freedom at an age that you can still enjoy it.

Let’s take a look at an example that let’s us visualize how this magic can actually happen.

Britney vs Michael

Historically, stocks have returned an average return of about 7% annually. PAST PERFORMANCE DOES NOT GURANTEE FUTURE RESULTS. Make sure to read that line again. You will see that line plastered all over investment documents and slide shows because nobody knows the future. We use the past as a a guide, but it really only provides us with an educated guess.

For this example I will assume a 7% growth rate, but please be aware that a small change in growth rate can drastically change the results. In most of my personal calculations, I use a growth rate of 5% to add in a margin of safety, but you will see the 7% number plastered all over the web. Please also note that you may need to contribute more or less in order to meet your own standard of living, but we’ll save that for another post.

Meet 20 year old siblings, Britney and Michael. They are both in college at the moment, getting good grades, and both are working part-time jobs. Britney has started reading Getting Rich Young and realizes that she can cut costs while still having fun and is able to start putting away $100 every month into an investment account. Michael continues to spend that extra $100 every month on the weekends. After all, that’s just what people do right? People also live paycheck to paycheck until they die, but that’s not what I want out of my life, and apparently Britney wants more too. She dreams of having enough time while she is young to work when and where she wants, while spending as much time with family and friends as she can.

Britney and Michael both graduate college and start working soon after graduation. Even though Britney has student loans, she still manages to put away the $100 a month. Tired by the end of every week, Michael manages to rack up $100 on “relaxation” over the weekend at bars, restaurants, and movies. Britney relaxes with bike rides, hikes, and at-home gatherings with friends.

10 years later, Britney is still putting away $100 every month, and finally convinces Michael to start putting some money away too. They both stick with the regimen and build up a small nest egg over time. By the time Britney is 65, she will have about $200,000 more than Michael in her retirement account! A total of $381,571.81 vs Michael’s $181,256.08. Also, notice that Britney only put in a total of $54,000 into her account. She let time and money work for her, and in return they made her a total of $327,571.81. Not bad. Not bad at all.

You can see that Britney starts to pull away from Michael as time goes on even though they are putting in the same amount of money every month later in life. What is really amazing about this jump start that Britney has is that she could have stopped contributing at age 30, while Michael contributed for the next 35 years and she still would have ended up with $20,000 more than Michael at age 65. Let’s see the chart for this one

Incredible. Michael contributed a total of 25 years more than Britney, and yet she is still better off. Hopefully this example has shown you the power of starting as soon as possible. On Monday we will talk about how to get started, so that you can take advantage of compounding interest as soon as possible.

Summary

Q: When should I start investing?

A: Right now

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What do you want to do when you retire?