Monday, July 26, 2010

Getting an early start at investing

It may not seem obvious but the earlier one starts investing, the better the odds that one will accumulate the money one requires at a later time. The secret word here as Groucho Marx would have said is compounding. Given sufficient time compounding can turn a small amount of money into a significantly greater amount. The key word here is time. Consequently, a person that starts a saving program at say age 18 is going to accumulate a great deal more wealth than a person who starts a saving program at age 28.

This can best be shown by an example.

A person who is 28 might be expected to be able to save significantly more money than a person age 18, but by the time the person age 18 reaches age 28, that person should also be able to save an equivalent amount other things being equal.

Let's assume that the 18 year old can save only $50 a month and that the growth rate of those savings is 5% annually. Then by age 28 that person will have accumulated $7546. Without saving another red cent, in 40 years that amount will then be worth $53,123 from an initial investment of only $6000.

But how much will the 28 year old have to save each month for 10 years to arrive at the $53,123 at age 68? The answer is $81.44 a month or about 62% more than the 18 year old. But remember the 18 year old is not going to stop investing just because he reached age 28. He/she is going to continue saving and investing.

2 comments:

  1. I am learning a great deal from your recent posts on what to look for when investing in stocks. I found that learning from other people and by doing is a great deal more valuable than by just reading books.
    P.S. i am the young man from yahoo answers that asked the question about stock screening and thank you for taking the time to give me an answer to my question

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