Posted by Allen White On November - 23 - 2010 1 Comment

The best way to become wealthy is to start young because your money has more time to compound. $10,000 deposited into your baby’s trust fund, earning 10% per year, would grow to $18,621,820 by the time your son or daughter was Warren Buffett’s age. – About.com

Now I am almost certain non of you readers are quite that young, but it is certainly something to think about. However, the goal of this post is to realistically show you what a huge difference a few years head-start could make when it comes to investing your money and reaping it’s rewards. Before I begin, for these of you who are not familiar with the Rule of 72, I would suggest you look at a post I made that quickly explains how it works, as I will be basing all my calculations with that rule for simplicity.

Starting Young

So lets say we have a boy, we’ll call him Little Bobby and he starts investing now at 18, how much of a difference can it really make compared to Big Ben who also starts investing but is already 24 years old. Assuming each person invest a sum of $10,000 at respectable growth rate of 12%. Using the Rule of 72, this means that the amount will double every 6 years. Lets compare the results.

Age Little Bobby Big Ben
18 $10,000
24 $20,000 $10,000
30 $40,000 $20,000
36 $80,000 $40,000
42 $160,000 $80,000
48 $320,000 $160,000
54 $640,000 $320,000

As you can see, starting earlier meant Little Bobby gets to have their money doubled one extra time, earning him a whopping $320,000 more than Big Ben who started at 24. Another amazing fact about this table is that in the last 6 years of Little Bobby’s investment, he made $320,000, which is MORE than the $310,000 it increased in total in the first 30 years!

Now some of you might think 54 is rather old, but consider this. Scientists believe that, in just our generation, with the rate we are making scientific breakthroughs, reaching the age of 90 will be an common occurance, which means that when you retire at 54, you still have a good 36 years of living left to do! Now assuming Little Bobby decided to wait until his 60th Birthday to spend the money, he will now have $1,280,000. Who said you can’t be a millionaire? Little Bobby did it with only $10,000, and without a single drop of sweat.

.

A better investment

Now let’s assume Little Bobby has done his homework and found a few nice opportunities to invest in, achieving an above average (but not unrealistic) rate of growth of 18%, meaning their money will double every 4 years, let’s see how that plays out.

Age Little Bobby
18 $10,000
22 $20,000
26 $40,000
30 $80,000
34 $160,000
38 $320,000
42 $640,000
46 $1,280,000
50 $2,560,000
54 $5,120,000
58 $10,240,000

$10 million dollars from a single investment of $10,000 when you were 18, the only research you will be doing in retirement is how-to spend your money!

More money in, way more money out.

For our final showdown, we have again Little Bobby, but this time he is more motivated than ever to become successful. He decides to invest $10,000 into his investment account every year for the first 4 years. Our challenger this time is Old Johnny. He is a 30 year old salary worker who makes a decent amount of money every year and has lived a pretty comfortable life so far. Old Johnny now feels the urge to invest his money, he hypothesis that since he has more money than Little Bobby, he could catch up on the lost years by putting in some extra money. He decides to double Little Bobby’s investment and puts in $20,000 every year, until he catches up. Let’s see how that works out shall we!

Age Little Bobby Old Johnny
18 $10,000
22 $60,000 (+$40,000)
26 $120,000
30 $240,000 $20,000
34 $480,000 $120,000 ($40,000 + $80,000)
38 $960,000 $320,000 ($240,000 + $80,000)
42 $1,920,000 $720,000 ($640,000 + $80,000)
46 $3,840,000 $1,520,000 ($1,440,000 + $80,000)
50 $7,680,000 $3,120,000 ($3,040,000 + $80,000)
54 $15,360,000 $6,320,000 ($6,240,000 + $80,000)
58 $30,720,000 $12,720,000 ($12,640,000 + $80,000)

Total Amount Invested:
Little Bobby: $50,000

Old Johnny: $560,000

Speechless? Little Bobby put in an extra $40,000 in the first 5 years, and he got more than $20,000,000 more at retirement for his troubles. But what is more amazing and have bigger implications is that although Old Johnny was doubling what Little Bobby was investing, and kept it up long after Little Bobby stopped, he was still $18,000,000 short compared to Little Bobby’s retirement. Not to mention the fact that Little Johnny invested in $560,000 of his own money!

Conclusion

I want to conclude this post with the fact that, although Old Johnny started late, he kept at it, and still ended up with a very large some of money ($12 million) when he retired. So the moral of the post is, it’s great to start young, but it’s never ever too late to start investing, as long as you start now!

Categories: Investing, Money

One Response

  1. Kat says:

    This is great article. Investing at a young age has got to be the smartest thing to do to protect your future. Great post!

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