Wednesday, November 3, 2010

time is an investor's best friend

Most people think that you have to be rich to be an investor. Nothing could be further from the truth. The secret ingredient for turning small amounts of money into considerable wealth is TIME. I would like to share a portion of a fund's prospectus that shows how big a difference starting early can make in one's journey to wealth:

Jack and Jill start working at age 25. Jill immediately starts investing $20 per week into an investment account that earns 7% per annum. Jack wants to enjoy himself a bit first and waits until he is 40 before investing $40 a week into the same fund. They both stop contributing when they retire at age 65. Despite putting in more than what Jill did, Jack actually has less money than Jill. Their end balance is as follows:
Jill: $213,903 (total contribution: $41,600)
Jack: $135,621 (total contribution: $52,000)
And they say math is not interesting. Jill has $78,282 more than Jack even if she invested less than him. The difference is that she started early and time was on her side, allowing compound interest to grow her money more. So the lesson is, start now and start small and let time be on your side.

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