Getting started investing sooner rather than later is important. Compounding interest and more opportunities to recover from losses can help you grow your portfolio over time.
While there are no guarantees of returns in investing, of course, a few hypothetical examples can show the effects of investing (and investing early) in the life of our volunteer, Fiscal Fran, at different points between now and her retirement.
For these calculations, we’re going to lay down a few ground rules. Our investor:
Let’s get started.
In our first example, Fiscal Fran gets $250 for her 18th birthday and puts it to work in the stock market right away. After that, she continues to invest $100 on the first day of every month like clockwork until her 65th birthday.
As you can see from the chart below, Fiscal Fran invests a total of $56,400 in her own money over time – and earns over $359,000 in returns alone (measured as “interest” on the graph below) over 47 years. By the time she’s ready to retire, she has almost $416,000 saved up to take a well-earned vacation and tide her over until she passes on.
In an alternate universe, Fiscal Fran’s alter-ego, Fiscal Fran Two, isn’t so lucky. Despite her best efforts, life gets in the way, and she doesn’t start investing until she receives a birthday check the day that she turns 34. This time, she’s determined to invest in her future – and so she does.
Unfortunately, Fiscal Fran Two lost 16 years’ worth of interest and contributions compared to the original Fiscal Fran. Over a period of 31 years, Fiscal Fran Two manages to squirrel away $37,200 in her investment account – but her earned returns drop to less than $92,000 by comparison. By the time she retires, she only has $129,000 in her brokerage account to kick off her retirement party.
Fiscal Fran Three is the unluckiest of Fran’s alter-egos, as she comes from a background that doesn’t put much stock in the financial markets. As such, she doesn’t start investing until her 50th birthday – and after seeing unrealized capital gains accumulate in the first month, decides that this investing thing can’t be so bad, after all. So, she diligently tucks away $100 per month until she retires.
Unfortunately, that lost time really cost Fiscal Fran Three. In a span of 15 years, she contributes just $18,000 to her brokerage account, which earns a total of $13,700 in capital gains and dividend returns over a decade and a half. By the time she retires, she has just under $32,000 to fall back on.
As we can see in our examples, barring a permanent and catastrophic shutdown of the global economy and financial markets as we know them, investing as much and as early as possible will generate larger returns than investing later (or not at all). And as you invest and your money earns interest, you can compound your earnings by reinvesting your profits right back into your portfolio – putting some truth to the phrase “earning stacks on stacks on stacks.”
So, how much should you invest in a non-hypothetical example?
Typically, financial advisors recommend stashing away at least 15% of your before-tax income in a combination of savings and retirement accounts if you start in your 20s. And as your salary increases, your contributions will rise, too – assuming that you stick to a percentage-based model.
However, the later you start investing, the more catch-up funds you’ll have to contribute to make the most of your retirement.
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