Invest Early and Often: The Power of Compounding

It’s no secret that the earlier you start investing, the more money you will end up making in the market for retirement. With the violent swings the market is taking these days along with a new Commander in Chief, the future is uncertain.  Even though it seems like the market is making new lows daily, it’s important to remember the key to being a successful investor, ‘buy low and sell high’.

Now back on topic…

In this scenario let’s take two fresh college graduates at the age of 22.  We’ll call them Jill Doe and John Smith.

Jill Doe starts to contribute $1,000 to her retirement account for only 10 years until age 32.  For unknown reasons, Jill forgoes making additional contributions and retires at the age of 65.  Jill contributed a total of $10,000.

John Smith decides to put off contributions because, well, being naive to the idea of investing and with new found money which he spends frivolously.  At age 32, John realizes he needs to save for retirement.  He contributes $1,000 each and every year until he retires at age of 65.  John contributed a total of $34,000.

For this example, let’s assume that the average market return is 8%.  Who would you say would have more at retirement? Jill or John?  John contributed $24,000 more than Jill.  So it must be John…well you would be wrong!

Does that surprise you?  Well, it’s true! Jill would have a balance of $214,188 in her account at retirement while John would have a balance of $171,316.  While respectable, this would be $40,000 less than Jill.  (If Jill would have continued the $1,000 per year contribution until retirement, she would have accumulated $385,505!)

This is the power of compounding.  Start early and often and you will reap the rewards. Question is, are you Jill or John?

Stupidly Yours,

Matt