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Should You Begin Investing Early?

Should You Begin Investing Early?

June 01, 2023

You are never too young to begin building an investment portfolio. In fact, investing when you are young can have the potential to produce impactful earnings gains. And that is because of a simple concept: compounding.

Like a snowball that grows as it rolls down a hill, compounding gives your money the opportunity to grow, continually reinvesting your investment earnings.

With compounding, the more you invest, the greater opportunity you have to create long-term value. I’m going to give you a hypothetical example to illustrate the power of compounding.

Let’s say that you invest $1,000 at age 20 and don’t add anything to the principal. You just compound earnings for 50 years until you turn 70.

If you take a 7.2% annual rate of return, by age 70, your $1,000 would have grown to $32,000. Not bad.
Now let’s say you take the same approach but delay investing until you’re 30. So that $1,000 has 40 years to grow. And assuming the same annual rate of return of 7.2%, your $1,000 investment will have grown to $16,000. Not nearly as good. In fact, that is a decrease of 50%.

Finally, if you invest $1,000 at age 20 and contribute an additional $83 a month – or $1,000 a year – until you turn 70, assuming that same 7.2% annual rate of return, your total savings will reach $465,000. Wow. That is nearly 15 times the first example, and 30 times the second example.

To be clear, these were hypothetical examples and are not representative of any specific situation. They’re just to illustrate the power of compounding. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. So, your results will vary.

There’s a fairly accurate formula that can help you estimate how long it would take for compounding to double an investment. Just divide 72 by the annual rate of return. The answer is the approximate number of years it would take to double your investment’s value, assuming a fixed rate of return.

As an example, if you earn 9% annually, it would take 72 divided by 9, or 8 years to double the value of your investment. Please note that this formula does not guarantee investment results and is just to give you an approximate idea of how quickly your savings can grow when compounding is at play.

If you are interested in putting together an investment strategy that fits your unique needs, please reach out to me or a member of our team to get started.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.

The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It approximates the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.