If there was one thing I wish everyone knew, it would be the difference regularly investing a small amount over time can make later in life.
The reason investing early in life is so important is because of this amazing thing called compounding.
When I mention compounding, what I’m talking about is reinvesting your earnings, and having those earnings earn more for you over time.
This basically means that every year, you earn slightly more because you previously reinvested your profits rather than spending them.
The sooner you start, the more time the magic of compounding works for you.
The easiest way to illustrate this is with an example.
Let’s say you have $10,000 and invest it in the Australian Stock Exchange, earning an average of 8% per year, comprised of 4% dividend income and 4% capital growth.
After the first year, the investment would be worth $10,800 (your initial investment of $10,000 plus earnings of $800).
Rather than withdrawing the money and buying something you don’t need, instead, you live your life in a wealthier way and keep your $10,800 invested for another year, earning another 8%.
At the end of the second year, your investment has now grown to $11,664.
All you had to do was invest $10,000 and not spend it for two years, and you’ve already made $1,164.
Also note how in the first year your investment only increased by $800, but in the second year it increased by $864?
That’s the power of compounding working for you.
Let’s see how this plays out for the next 30 years:
Year | Capital Invested | Return on Investment | Value of Capital |
Year 1 | $10,000 | $800 | $10,800 |
Year 2 | $10,800 | $864 | $11,664 |
Year 3 | $11,664 | $933 | $12,597 |
Year 4 | $12,597 | $1,008 | $13,605 |
Year 5 | $13,605 | $1,088 | $14,693 |
Year 10 | $19,990 | $1,599 | $21,589 |
Year 15 | $29,372 | $2,350 | $31,722 |
Year 20 | $43,157 | $3,453 | $46,610 |
Year 25 | $63,412 | $5,073 | $68,485 |
Year 30 | $93,173 | $7,454 | $100,627 |
All you had to do was invest $10,000 today and never touch it again, and you’ve got $100,000 in 30 years.
Not bad hey.
Let’s just appreciate some of the benefits here.
Firstly, all you had to do was find $10,000, invest it in an asset that provides the typical historical performance of the stock market, and never touch it again, and you will have amassed a small fortune of $100,000 in 30 years.
Or how about this. All you had to do to earn $90,000 was invest $10,000 and not do anything again?!
Imagine how many hours you would have had to work to earn this kind of money. This is literally the best example of making your money work for you.
Talk about giving your future self an epic gift!
The good news is that it gets better from here.
Imagine instead you originally invested $10,000 and then another $500 a month for the next 30 years. Your wealth would spiral to an epic $780,000 over 30 years.
Year | Capital Invested | Return on Investment | Additional Capital Invested | Value of Capital |
Year 1 | $10,000 | $800 | $6,000 | $16,800 |
Year 2 | $16,800 | $1,344 | $6,000 | $24,144 |
Year 3 | $24,144 | $1,932 | $6,000 | $32,076 |
Year 4 | $32,076 | $2,566 | $6,000 | $40,642 |
Year 5 | $40,642 | $3,251 | $6,000 | $49,893 |
Year 10 | $95,915 | $7,593 | $6,000 | $108,509 |
Year 15 | $174,661 | $13,973 | $6,000 | $194,634 |
Year 20 | $291,835 | $23,347 | $6,000 | $321,181 |
Year 25 | $464,000 | $37,120 | $6,000 | $507,120 |
Year 30 | $716,968 | $57,357 | $6,000 | $780,326 |
When thinking about compounding - there’s no better time to get started than now (unless you have a time travelling machine and can go back and invest in the stock market 100 years ago).
You need to give your money the longest period of time to work its magic. The longer the money is invested for, the more time compounding has to work for you.
Lesson number one on the way to financial glory - start investing as soon as you can, for as long as you can.
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