Start Early
It's easy for investing to get lumped into the list of things you'll eventually get around to. But the impact of time on an investment makes starting early a wise move.
Investors who start early in life can really benefit from the effects of compounding. In fact, it can be difficult for investors who start later in life to catch up with those who started early.
The rewards of starting early
To see how starting early can pay off, let's consider a hypothetical situation in which two friends named Rachel and Sarah start investing at different times.
Rachel starts early. Rachel is 25 when she starts investing $100 each month. After 10 years of regular monthly investments, she buys a house and needs that $100 to make the mortgage payment. She stops adding to her investments, but she doesn't touch her account until she retires at age 65.
Sarah starts later. At age 35, Sarah realizes she doesn't have any retirement savings and decides to start investing. She invests $100 every month until she retires at 65.
Starting Early Can Reward Investors
Assumptions: 8% average annual return; all earnings reinvested; no fluctuation of principal. For illustrative purposes only. Not intended to predict or represent the performance of any Franklin Templeton fund.
Rachel comes out ahead. Sarah contributed to her investments for 30 years; Rachel for only 10. Sarah contributed a total of $36,000; Rachel invested only $12,000. So, how can it be that Rachel has accumulated more money than Sarah?
One word: Compounding
That's the secret behind the growth of Rachel's nest egg. And when money grows as a result of compounding, time is a major influence on that growth. As time passes, the effects of compounding increase. By starting 10 years earlier than Sarah, Rachel gave her investment more time to benefit from the effects of compounding.
A good lesson for kids
If the story of Rachel and Sarah was an eye-opener, imagine how starting early could impact an investment for somebody with even more years ahead—like a teenager.
For example, let's say 15-year-old Luke makes $1,000 mowing lawns one summer. And with some encouragement from his parents, he invests the money instead of spending it.
After 50 years of compounding. While Luke's been busy living, his $1,000 investment has been chugging along at an average annual return of 8% with all earnings reinvested. After 50 years, when Luke is ready to retire, his $1,000 has grown to $53,878. (The example is for illustration only and doesn't predict or represent the performance of any Franklin Templeton fund.)
This lesson can be a powerful one for kids. If you're a parent, teaching your kids about compounding and encouraging them to start investing early could be the greatest gift you ever give them.
If you can't start early, start now
If you're kicking yourself right now because you didn't start investing earlier in life, stop. Regret won't change anything. Instead, begin investing as soon as possible. Starting late will do you more good than never starting at all.
You need Adobe Acrobat Reader 6.0 or higher to view and print PDF documents. Download free version from Adobe's website.
For U.S. residents only.