Investing

Why you should start investing, even as an employee [Part 2]

In Part 1 of the mini-series, we showed the power of exponential compounding returns. Today, let me show you an example of how time plays a big factor to compounding and why you should start investing early, even when you are an employee, to reap this benefit .

Starting early outweighs how much you save.

The chart below shows 2 investors, Amy and Bob. Amy invests $12,000 for 20 years year at 5% per annum (pa), between age 25 – 44, whilst Bob started 10 years later, invests $12,000 a year at 5% pa for 30 years, from 35 to 65. Another person, Charlie, who does not know how to invest and is more risk-averse, saves $12,000 a year for 40 years, from 25 – 65 before he retires.

At age 65, Amy has contributed $240,000 and is worth slightly over $1 million. Bob contributed $360,000 and his net worth is about $800,000. Charlie’s contribution and his net worth at age 65 is about $500,000.

@ Age 65

Amy

Bob

Charlie

Total Contribution

$240,000

$360,000

$492,000

Net Worth

$1,022,374

$837,129

$492,000

As Amy started early, even though she contributed 30% less than Bob, her net worth is 20% more than Bob. Notice Charlie contributed the most, yet he has the lowest net worth.

Benefits of starting early - Why you should start investing, even as an employee [Part 2]

In this exercise, you realise that if you start investing at age 25 with $12,000 a year, even if you stop contributing after 20 years, you could be on your way to be a millionaire. You also realise that $12,000 a year is only $1,000 a month!

If we tweak the interest to a higher rate, the difference in gains of Amy over Bob and Charlie after some 40 years will be even greater!!

@ Age 65 Amy’s Net Worth Bob’s Net Worth Charlie’s Net Worth
Interest of 3% pa $561,350 $588,032 $492,000
Interest of 5% pa $1,022,374 $837,129 $492,000
Interest of 8% pa $2,507,948 $1,468,150 $492,000
Interest of 10% pa $4,552,133 $2,171,321 $492,000
Interest of 12% pa $8,243,322 $3,243,511 $492,000
Interest of 20% pa $85,719,941 $17,019,095 $492,000

Let Compound Interest do the work

So as you can see, in the previous article, we showed that you can achieve a sizeable return with a small capital, and starting early definitely beats starting later. So even if you just started working, by starting early with a small sum, and letting your investments exponentiate, you can achieve a sizeable return over time.

Would you rather work hard or let compound interest and time do the work?

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