Have you ever thought: “I’ll start investing in a few years when I have more money.”? If you have, you are cheating yourself! Read this and find out why it makes sense to start now.
A lot of people postpone the start of their investments because they believe that they will earn more money later in life. They can therefore justify themselves to wait and thus instead use a little extra on house, car, clothes, etc. right now. This is a priority and we are not able to say if you are happier to spend the money now or wait. However, in this post we will try to motivate you to start investing early in your life using a small example. What we would like to show is that one of the most important factors of an investment is time.
Amanda, Bella and Christina’s pension
This example is based on three sisters, who have all learned that it is important to save up for their pension. The three sisters will each contribute 1 million in total until they reach 65, but are going to do it based on different beliefs.
Amanda and Bella both want to get started quickly, as the total amount will then be split into smaller monthly contributions. There are five years between the sisters, so Amanda begins to contribute when she is 20 years old, while Bella starts as 25 years old. Christina is 25 years old like Bella, but disagrees with her sisters to start early as she would rather spend the money she earns while she is young on a home, new clothes and experiences. She figures that she will just double her contribution from when she turns 45 when she expects to earn a higher salary at that time.
In the coming years, the three sisters put money aside after their individual plans and invest the money in stocks that return 8% a year until they are 65 years old.
Amanda contributes 1850 a month for 45 years
Bella contributes 2100 a month for 40 years
Christina contributes 4200 a month for 20 years
That means a total of 1 million each.
When Bella and Christina retire at the age of 65, they can see that their pension savings are very different, even though they had both deposited exactly one million and received exactly the same annual return on their investments.
Christina can see that she has 2.5 million in her pension account and Bella is pleased to discover that she has 7 million in her pension savings. When Amanda 5 years later turns 65, the million she has invested in her pension savings has become 9.3 million.
The three sisters have all paid the same amount, but at different times, which turns out to have a big effect (read more about compounding interest here). So if you want your savings to grow as much as possible, you should hurry up and get started!
NB. In this example, tax, investment costs and inflation are not taken into account. We will go further into these topics another day.