A penny saved is much more than a penny earned.
I get this question at least three times a day. Why do you invest? Most of the time, I answer “Why don’t you invest?” People laugh at the fact that I am 15 and have already invested a significant portion of my assets, but after reading this blog post, you will be scrambling to open a brokerage account.
Well, the reason I invest is all about math. (I know you don’t like math, but keep reading!) My annual performance for last year was about 24%. That’s extremely good, probably one of the best years I will see in a while. I expect on average though, to make about 10-20% 20 at a very high end.
So now lets do some math. Lets say 50 years from now when I’m about retirement age, 65 years old. Let us start with $5,000 and we’ll go from there. If I make 15% a year average for 50 years starting with $5,000 in the end, I have about $5,418,287.21 not bad. But that is just leaving the $5,000 and not adding any money. Here is the beauty, if I add just $100 a year, that number becomes $6,140,058.84, a nice Lamborghini to add to the mix. This works because the first year, an extra $100 added is about 2%, so it makes that 15% become an instant 17%, (Which over the course of 50 years moves closer and closer to 15%) it doesn’t look like a big difference, but it is.
Now lets look at what happens if we add $1,000 a year. That final number becomes $12,636,003.49, once again, not bad at all for retirement. Instead of an extra 2% we have there in the beginning, we are adding 20% and making a 35% return that first year. Just for fun, lets see what a 25% average return with $1,000 a year added would get me. While I’d have to be quite a good investor to make 25%, if I could pull it off I would have a nice, cool, $630,580,308.95. More money than Mitt Romney. If I kept that invested for just 1 year more, I would make $157 million that year, which pays a nice wage of $17,922 an hour.
Lets go back to the 15% with $1,000 added a year I was talking about earlier. If I kept the money invested for 51 years instead of 50, I would make $1,896,401 that year, or about $216 an hour, 24/7.
Every year until age 25 I don’t have my money invested, I lose $951,759 a year.
People also ask me, why I don’t wait till I am about 25 years old to start investing? Let’s do the same equation with 40 years on the clock instead of 50 with the same starting value of $5,000 adding $1,000 a year at 15% a year. I would have only $3,118,408. Yeah, that’s nice but that’s a whole lot less than $12,636,003. So if this math works, investing just ten years before everyone else is worth about $9,517,595 to me. That’s $951,759 a year and about $108 an hour. That means that every hour you don’t have your money invested, it is the equivalent of losing $108 an hour, 24/7.
Even if I make 10% a year, which after 50 years is $1,867,000. If I started 10 years later and only do 40 years, I only have $713,148. You can still see the major increase that the extra 10 years adds.
This sort of shows why I hate buying food. Lets say I spent $10 on lunch, I eat it, bye bye $10. Lets see how it is in 50 years with a 15% interest rate: $2,678. That means, for every $10 you spend now, in 50 years will cost you $2,678. While I’m not telling you to starve yourself, you should get the idea. Now that you understand the cost of your actions, it is time to start putting your money away, and investing.
Time is money
TIP: Another cool thing you can try, is adding 15% to the money you put in every year. That means if you start at $5,000 and add $1,000 that year, the next year add $1,150…
If you are wondering how I made these calculations, or you want to play with your future money, here is a shortlink to a nice calculator: http://bit.ly/dWWXh
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