This is my very first blog post and I’ve already missed my punchline with the title!
However, the information that is contained is very urgent and I really want you to listen closely.
I want to share a secret with you, a hidden treasure. The best time to start investing is…*dramatic pause*…right now!
I haven’t noticed this by reading one of those Wall Street magazines or listening to one of those self-proclaimed stock market experts. I used one very old tool of mankind. It is loved by few and hated by many. I’m talking about math.
First of all, before we dive into the details of this mystic source of power and how I came up with this solution, let’s start with another old tool of human beings. I want to share a story with you that impacted my (financial) life.
The one chat with a colleague that changed my view on investing
One year ago, I was part of a small system consulting company in Germany. From time to time I was going to dinner with my colleagues and they always had a new game to share with me. Pokemon Go! wasn’t entertaining enough anymore and they moved on to a trading app that offered a free account with some fake money to get into investing. You were able to pick individual stocks and build up your portfolio. They were thrilled at the numbers they were seeing and asked me to download the app and join them.
I told them that I wasn’t interested because I am a conservative type of investor and prefer to buy stocks in my real life. They didn’t know that I was investing and we had a chat about it that went like this:
Colleague: Wow! I didn’t know that! But where do you take the money from? You are just a working student.
Me: Well, I’m pretty good when it comes to finances and always take aside some portion of my salary.
Colleague: Okay, well I think it’s just too risky for me. Otherwise, I would maybe start investing also.
Me: As Warren Buffett said ‘It’s just a risk if you don’t know what you are doing’.
Colleague: That’s maybe true, but I don’t have the time to inform myself about it and I want to wait for my mid-30s. I want to have some fun in my life.
Me: You know what compound interest is?
Colleague: Sure, but in a few years I will have a lot more time and I have more money to invest. So it’s no big deal.
Me: Hmm, I don’t know. I think it’s good to start as soon as possible.
Colleague: *moving on to another discussion with other co-workers*.
Me: *still thinking of the conversation about investing*.
The little math that changes everything
As a result of this chat, I sat down on the same evening with my calculator and a good old pen and paper. I was 25 at that time and I would have to work til 65-67 in Germany before I can retire without taking cuts on my retirement payments. So I decided to calculate the difference between starting now and starting 10 years later with just the investment I did monthly.
I spent $100/month on index funds. The market has an average annual return of 8%. So I assumed that this will be the same over the next 40 years.
My calculation should tell me what’s the difference between start investing now vs. waiting another 10 years to start.
I was shocked! Initially, I thought my calculations were flawed.
To back up my values, I used this neat tool.
In the image below you can see the result:
With a $100/month donation, you only save an extra of $12,000 during these 10 years. Though, the difference is that the amount of money is more than doubled!
This small monthly contribution leads to $351,428.12 in 40 years! I bet you can put a little bit more aside!
Wait! That’s not the end of our calculations!
I was already on the trip to improve my finances but then I picked up a great read by Ramit Sethi! In his book, I Will Teach You To Be Rich he talks about exactly the same thing as I did. But he goes even further!
He writes that even if you stop making your monthly contributions after 10 years (at the age of 35) and just keep your money in these funds, you will have more money when turning 65.
I couldn’t believe my eyes and went back to a calculator again. Here are my results:
Case 1. Starting at 25 with $100/month.
At 35: $18,416.57
Stop doing monthly payments and just get 8% annually.
At 65: $201,398.63
Case 2. Investing from $100/month from 35 to 65.
At 65: $150,029.52
You invest only for 10 years and you will gain more money than investing for 30! This is a difference of 20 years and $36,000 of monthly payments and you will still lose $50,000!
You should start investing now! But not just because of our calculations!
Enough of the spectacular math for today. The results are just impressive but there are even more benefits!
Let me give you some additional motivation in list form:
- The sooner you start investing, the earlier you will fail. It will be just a normal learning process and you will make mistakes! Better do them now as long as the damage is limited!
- I have to make a confession. I assumed that the market growth will always be at 8%. It simply isn’t. It goes up and down all the time. The longer you invest the more likely it becomes that your gains tend to be 8% overall (or even more with better strategies).
- If you start young, you’ll have a whole lifetime to recover from dropping markets. If you wait for it until you turn 55, you probably have to take a less risky approach. This also means it’s an approach with fewer gains.
- You may think the worst case is that you’ll lose money by investing in the wrong stocks. But actually, the worst thing that can happen is that you don’t even start investing and miss out wealth and failures that lead towards to it.
- The market will never have the perfect conditions to start! There is no such thing as the perfect timing.
Are you already investing or do you still lack some motivation and guidance?