Waiting to Invest? Here's Why You Can't Afford to Wait.
September 14, 2018 By Henry Dominguez
Hey Readers! Quick note before we dive in:
This is a post about the importance of long term financial investing. My intention is to change the way we think about money and to improve our financial intelligence. If you're planning on starting a business, or you're ready to improve your financial situation, this is for you. It's difficult to time the market and impossible to know what the best investment opportunities are for you. However, if we start preparing ourselves now, we can increase our ability to take on more risk over time. As you may have heard before; no risk, no reward.
Disclaimer: This is for informational purposes only and does not intend to be a complete description of investment or financial advisory services.
I've been investing for the last 15 years. When I was 19 years old I started investing $100/ month. Now I'm investing over $400/ month and I plan to continue increasing my contributions every year.
I've also reviewed the performance of my portfolio over the last four years and have seen as much as 20% returns in a single year. This isn't the case every year, but the economy moves in cycles, some years are great, some years can be disappointing.
My goal is to grow enough wealth so that I can have more freedom and control over my work and quality of life. I also believe that the more I have, the more I can give. And the wealthiest people in the world are (sometimes) the ones that give the most.
Have you thought about investing but decided to put it off because you think you can't afford it? The truth is, waiting to invest has its cost, here's why.
The following example is to establish an understanding of how financial investments can make a significant difference through compounding interest over long periods of time.
I recognize that not everyone can set aside the same amount of money I have, so I created a hypothetical example with these parameters.
$200 per month at 6% return.
A good starting point for anyone is to set aside about 10% of your monthly income, but you can also start with $50 and work your way up from there when you're ready. It's up to you.
This is what 1 year of investing $200/ month looks like, assuming a 6% return, on a monthly schedule.
$200 x 12 months = $2,400
At an average 6% return, you will have $2,467 at the end of the year.
You made $67. Good Start.
Starting Early (Start Now)
It may not seem like much, but if you continue investing $200/ month when you're
20 years old, and stop contributing after 10 years, you will have a higher balance when you're 60 than your friend who starts investing $200/ month at 30 years old, for 30 years.
This graph shows the timeline for two investors starting at different times:
$200 per month at 6% return.
Amy and Brian
Because Amy started investing 10 years before Brian, she will retire with more money by the time they are both 60. She didn't work harder and she didn't get a higher return. She just started investing earlier.
The following graph shows their monthly contributions and total contribution time. Amy invested $200/ month for the first 10 years, then stopped. Brian invested $200/ month for 30 years.
Monthly Contribution Contribution Time
Amy $200 10 years
Brian $200 30 years
The next graph shows their total contributions and total investment time. Amy's total contribution was $24,000 over 10 years, then she waited for 30 years. Brian's total contribution was $72,000 over 30 years.
Total Contribution Investment Time
Amy $24,000 40 years
Brian $72,000 30 years
Monthly Contribution Contribution Time Total Contribution Investment Time Ending Balance
Amy $200 10 years $24,000 40 years $164,952
Brian $200 30 years $72,000 30 years $160,809
Amy contributes $200 per month for 10 years.
$200 x 12 months = $2,400 x 10 years = $24,000 total contribution
Her total Investment time = 40 years
Her ending balance = $164,952
Brian contributes the same $200 per month for 30 years
$200 x 12 months = $2,400 x 30 years = $72,000 total contribution
His total Investment time = 30 years
His ending balance = $160,809
This next graph shows a comparison of their projected investments every 10 years, assuming an average 6% return.
Year 1 $200 $0
Year 10 $32,776 $200
Year 20 $59,632 $32,776
Year 30 $90,663 $70,646
Year 40 $164,952 $161,309
Amy invested $24,000 and got back $164,954.
Brian invested $72,000 and got back $160,809.
Do you see the difference? Brian contributed 3 times more than Amy, so how does Amy have a higher balance than Brian? She didn't work harder and she didn't get a higher return. She just started investing earlier.
As designers, we are trained to think critically and creatively. Investing is about our capacity to use that creativity so that we don't have to continue trading our time for money. Regardless of your economic condition, your age, or where you are in your career, I believe you can become an investor.
So, do you want to continue working for money, or do you want to start having money work for you?
Use time to your advantage...Start now!
Want to take a look under the hood? The table below shows the schedule for Amy and Brian every year, by the month, assuming an average 6% return every year for both investors.
If you want to start investing you might be wondering where to put your money . There are lots of options, stocks are one of many. And there are also different types of accounts that rely on stocks including, actively managed accounts, robo-advisors, and Index funds, to name a few. This can be overwhelming.
In my next post I'll explain how to get the most out of the market, and why I hate 401(k)s.