How Investing Early Can Make You Rich
Marissa Mah, B.Comm., LL.B., LL.M. - Aug 10, 2023
“The best time to plant a tree was 20 years ago… The second-best time is now." Let’s take a look at just how important these words are to securing your financial future
A well-known Chinese proverb says, “The best time to plant a tree was 20 years ago… The second-best time is now.”
The meaning of these words is that starting any endeavour in life is often best done early, so that we have more time to accomplish our goals; however, if we have not yet started working on those goals, it is never too late to begin – hence, starting now is the next best option.
The wisdom of this idea is especially relevant to the topic of wealth creation. When it comes to investing, starting early – or as soon as possible – is essential to maximizing your wealth.
Let’s take a look at just how important these words are to securing your financial future.
How time is your most valuable asset
When it comes to building wealth, time is your greatest ally. Having time gives you more opportunity to earn money through traditional means, such as your job or business ventures. Most importantly, however, time can significantly enhance the power of compound growth.
‘Compound growth’ is the money you earn when you invest not only a starting sum of money (the ‘principal investment’), but also the returns earned on that initial sum of money. In other words, compound growth = the money earned from investing ‘principal + returns’.
For example, let’s say you invest $10,000 in the stock market, and you earn a 7% return that year on the initial (principal) investment. That means you walk away with $10,700 – a profit of $700. If you take that $700 and re-invest it into the stock market, and earn another 7% the following year, you have now made an additional $749 (i.e., 7% on $10,700). Importantly, this is slightly more than the first year’s profits, even though you have not invested any additional money from your pocket. Overall, two years later, you now have $11,449 – a total profit of $1,449.
If you continue re-investing each year’s profits for many subsequent years, you can easily see just how much your initial $10,000 investment can grow:
- 5 years later: $14,026
- 10 years later: $19,672
- 20 years later: $38,697
- 30 years later: $76,123
- 40 years later: $149,745
And remember – all of that money was made while you did nothing, other than simply re-investing your profits from your original $10,000. This is what “putting your money to work” means… your money can grow and “do the work” on its own, as long as you keep investing what you earn.
Most importantly: as you can see from the numbers above, the longer you repeat this process, the more powerful it becomes. In the first 5 years of compound growth, you profit $4,026; in the 5 years thereafter, you make an additional $5,646. Hence, each additional year of re-investing becomes more valuable than the last.
Now let’s imagine that you combine both of the previously mentioned advantages of having time.
Maybe you don’t have $10,000 to put into the stock market up-front; however, in the time you have each week, you are probably making a salary from your job or accumulating profits from your business.
If you start directing the value of this time into using the power of compound growth, you can profit enormously.
Say you start with $0, but you invest $100 a week from your work/business earnings into the stock market and earn an average of 7% a year on your investments over time. The longer you do this, the more your wealth will grow exponentially:
- 5 years later: $30,919
- 10 years later: $74,283
- 20 years later: $220,410
- 30 years later: $507,864
- 40 years later: $1,073,328
Again, remember: you did not do any extra work – other than putting your money into the stock market each week – to make these profits. You let your money do the work instead.
Perhaps more importantly: if you had spent that $100 a week on something else, think about how much money you would have lost over time.
Overall, we can clearly see that starting as early as possible with investing has incredible power. The more time you have, the wealthier you can become – even without any extra work.
The second-best time…
As the above examples demonstrate, the ideal way to maximize your money is to have already been invested for many years.
However, if you have not yet started your investment journey, don’t panic! As the Chinese proverb tells us: the next best time to plant our financial tree is right now.
It’s easy to be hard on ourselves and think, “if only I had started earlier!” Knowing what you do now about compound growth, it’s understandable that you might feel regret about that ‘lost-time’.
That being said, the honest truth is that feelings of regret don’t help us achieve our financial goals. Actually, all they really do is make us feel miserable!
Instead, rather than lingering on that regret, the better solution to securing your financial future is to take action now. If you have missed out on years of compound growth, the wisest way forward is to make sure you don’t lose out on any more time. You can’t change the past, but the future is yours for the taking… and the only way to change the future is to do something different in the present.
Sometimes, though, taking action can feel overwhelming. When it comes to investing especially, many people might feel like they don’t even know where to begin.
Luckily, you don’t have to start this journey alone. Having a trusted financial advisor can help you overcome those first intimidating steps, so you can start taking advantage of the power of time as soon as possible. After all, it’s easier to grow a tree if you have someone to help you plant its roots and tend to its branches.
Whether you want to know how to start your investment journey now or would like expert advice on how to ensure you are making the most of your compound growth going forwards, we would love to invest our time in talking to you about your financial future.