The case for starting early
Think that money is the most powerful building block of wealth? Try again. The Wealth Quay in Wollongong says that if you understand the power of time, you can unlock wealth beyond your wildest dreams.
What if I said that the key ingredient to building a fortune didn’t cost a cent and that, give or take, we’d all inherited the same amount of it? Now you’re listening.
We’re talking about time.
Of the three building blocks of wealth – money, return and time – the most powerful of these is time. That’s because of compounding, a force so powerful that Einstein is said to have called it the ‘eighth wonder of the world.’
You’ll want to fire up MoneySmart’s compound interest calculator while I explain and make the case for starting your investment journey early.
Let’s start with a scenario and punch in some figures.
You’re 23, fresh out of university and you have $2,000 to sock away into a managed fund for a rainy day. You add $50 per week to it for the next ten years and reinvest the 7% annual return. By the time you blow 33 candles out, you will have contributed $28,000 to the fund for a total return of $39,857. So far, so good.
But this is where compounding gets interesting.
Of the three building blocks of wealth – money, return and time – the most powerful of these is time. That’s because of compounding, a force so powerful that Einstein is said to have called it the ‘eighth wonder of the world.’
If you did nothing else and left it there until you were 65 years of age, you’d have $347,365. If you kept on contributing until you were 43 – and you’ll have amassed a tidy $506,519 by the time you were 65.
With a modest $50 per week for 20 years, you can quickly see that time is your friend.
Tip in $100 per week for 10 years from 23 until 33 and you’ll have an eye-watering $660,443 at 65. Do it for 20 years and you’ll have a cool $978,747.
Let’s have a look-see at what happens if we delay our investment journey until we hit 43. Under the same scenario if we start with $2,000 and tip in $50 per week for 22 years up until age 65 you’d end up with $136,276.
Or to put it another way – to get to $347,365 you’d have to tip in about $133 per week. That is nearly triple the amount for 22 years what it took the 23 year old ten years to do.
You can’t argue with the mathematics of compounding.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.