Tip #2: Time makes money
Hey everyone, this is Ivanhoe Sánchez again, the Bucket Guy and this is my channel, The More You Know.
This is the second video of a series. If you missed the first one, I invite you to go back and watch it and learn how to start investing painlessly.
This time around we are going to discuss why is so important to START NOW. That’s because invested money is working for you, due to the power of time and compounding. Tip #2: You need to understand the Power of Time + Compounding
When it comes to investing, time is one of your greatest allies. Why? Because when time joins forces with compound interest, your account value grows dramatically. Think of compounding interest as getting a return on your return. Here’s an example:
- A 25-year-old wanting to have a $1 million nest egg at age 60 would need to invest $880.21 each month assuming a constant return of 5%.
- If that 25-year-old waits 10 years to start investing, he would need to ‘invest $1,679.23 each month using the same assumptions.
- If he waited 20 years? That 45-year-old would need to invest $3,741.27 each month to accumulate the same $1 million by age 60.
The only difference between these three scenarios that we just look at, is the impact on the investment of the combination of time and compounding interest. It can make a huge difference between retiring in comfort or, well...not.
In the next video, we are going to discuss the importance of having an emergency fund. In the meantime, if you know anyone who would like to better understand the benefit of compound interest, let’s connect.