“Compound interest is the eighth wonder of the world.
He who understands it, earns it, he who doesn’t, pays it.”
Compound growth, which I explain in depth in THIS article, is the key for anyone to become a millionaire. Harnessing this tool is the most surefire way to build wealth, regardless of how smart you are, how much you earn, or what your parents do for a living.
One of the biggest benefits to compound growth is that the earlier you start, the more time it has to grow. Think of your money as a snowball, and of the time until you retire as the height of a hill. Beginning to roll your snowball at the top of the hill will give it more distance to roll and grow. The bigger the hill, the bigger the snowball at the bottom. The earlier you save, the bigger your retirement fund.
Let’s take a look at how compound growth can work in real life.
COMPOUND GROWTH IN ACTION
Jodi and Hannah, two friends that are just about to turn 20 years old, have very different thoughts on their financial future. Hannah really enjoys spending her money on clothes, her car, and partying, and plans to start saving once she decides to settle down a little bit at 30. Jodi, on the other hand, read this really great article on Financial Fanny Pack about how helpful compound growth is. She decides that she can cut back a little bit on her spending and start investing for retirement. Both ladies expect their investments to grow by about 8% each year.
For the next 10 years, Jodi invests $5,000 per year, but then stops when she turns 30. After these 10 years, she will have invested a total of $50,000. Not great, but it’s definitely a start.
Hannah, on the other hand, invested a total of $0 in her 20s, but is really going to start saving now that she is turning 30. She is planning to save $5,000 every year until she turns 65 and retires. After 35 years of investing, she will have invested a total of $175,000. The extra $125,000 she saves over Jodi is no small sum of money, but let’s see how well the ladies have done by their 65th birthdays.
Although Hannah invested $125,000 more, Jodi still ends up with over $220,000 MORE in her retirement account than Hannah. Having a head start of a few years has given Jodi a huge lead over Hannah. Not to mention the fact that Jodi has an extra $5,000 in spending money each year for a quarter century longer than Hannah.
If you don’t understand the impact compound growth has yet, had Jodi started investing at 19 instead of 20, that extra year would have allowed her retirement account to grow an extra $92,000. Starting one year earlier and investing the same total amount that she did in the other scenario could have ended up buying Jodi another house.
Makes you regret not starting in high school, doesn’t it?
WHAT SHOULD YOU DO?
Start as early as you possibly can. There are plenty of different funds and investments opportunities out there that will let you start investing with just a few hundred bucks. If you’re 20 now and you invest just $1,000, you can reasonably expect to have around $30,000 by the time you’re 65.
Obviously that’s not enough to retire on, but it will probably cover a good amount of your expenses for a year. One somewhat small investment now can pay for you to live for a year. Think about that. Can you believe it? Crazy.
What if you aren’t 20? That’s okay, honestly, it’s never really too late. We can see that even though Hannah started at 30 and only saved $5,000 per year, she still retired with 5x more than what her investments were. She was still able to nearly become a millionaire.
Regardless of where you are in life, start saving and investing now. There are plenty of options (actually an overwhelming amount of options) out there that can suit your needs. Two of the biggest and most popular investments are Spider (SPDR) funds and Vanguard funds. If you know a little bit about finance, it may be worth doing some research and seeing what works for you. They are both pretty easy to begin investing in, and once you begin, they take very little effort to maintain.
If you don’t know anything about finance, that’s okay! That’s part of the reason you’re here. We will cover various investment options in other posts. In the meantime, talk to a financial advisor or somebody with experience in investing (parents, or a family friend, maybe?) to see what options they might recommend for you. Likely, they will be willing to actually help you through the entire investment process. Be aware, though, that you will probably have to pay a professional advisor some fees in exchange for their services. But don’t let this turn you away from investing now, it’s a small price to pay to have a sound financial future!
At the end of the day, you will need to do a bit of research and put in a bit of effort, but it’s 100% worth it in the long run. If you want to retire a millionaire, the easiest way for you to get there is to start now.
Carpe diem ya’ll.
How much can you afford to save, and how much will that give you by retirement? Leave a comment below with any input!