Start Investing Early
The earlier you start investing, the more you will have later in life and the less you will have to save to achieve the same goal as a person starting later.
An Example
I regularly watch Jazz Wealth Managers on YouTube. Several times Dustin Tibbits has mentioned that if a person invests $5000 every year between ages 25 and 35 and then stops investing any new money, then by the age of 65 he will have more money than a person who starts investing $5000 every year from ages 35 to 65. So if you compare the two people at age 65, they will have around the same amount saved. 11 years vs 31 years.
Assumptions
So let’s look at several cases with the following assumptions:
- We are mainly interested in how much is in the account at the end of age 65. This makes the math easier.
- The years where the amount that is saved includes both the starting and ending year of age.
- We assume $5000 per year and 7% annual rate of return.
A What If Spreadsheet
I created a portfolio growth spreadsheet where you can do some ‘what if’ scenarios with different starting and ending years along with contribution amounts and interest rates.
Results
Here are some results:
- If you save $5000 for 2 years between the ages of 1 and 2, you will end up with $786,000 at the end of year 65. $10,000 gets you $786,000.
- If you save $5000 for 3 years between the ages of 10 and 12, you will end up with $620,000 at the end of year 65. $15,000 gets you $620,000.
- If you save $5000 for 5 years between the ages of 16 and 20, you will end up with $646,000 at the end of year 65. $25,000 gets you $646,000.
- If you save $5000 for 10 years between the ages of 25 and 34, you will end up with $602,000 at the end of age 65. $50,000 gets you $602,000.
- If you have $5000 for 31 years between the ages of 35 and 65, you will end up with $546,000 at the end of year 65. $155,000 gets you $546,000.
Notice that the longer the money compounds, the less money you have to save. The older you are when you start, the harder it is to catch up. If you wait until the age of 35 to start investing, you have to save a larger amount than those who started earlier.
Table Summary
| Starting Year | Ending Year | Number of Years | Amount Saved | Amount at End of Age 65 |
|---|---|---|---|---|
| 1 | 2 | 2 | $10,000 | $786,000 |
| 10 | 12 | 3 | $15,000 | $620,000 |
| 16 | 20 | 5 | $25,000 | $646,000 |
| 25 | 34 | 10 | $50,000 | $602,000 |
| 35 | 65 | 31 | $155,000 | $546,000 |
Here is What You Should Do
So what is the takeaway from this?
Start Early
First of all, start an investment account for your kids early. If you have young kids or grandkids, start investing immediately. You can open a Universal Gift To Minors Act (UGMA) account and start putting money in the account and investing it in a S&P Index Fund with a low fee company like Vanguard or Fidelity. If the child is older and starts to earn income, open a Roth IRA. You could move the money from a UGMA account to a Roth IRA once they start earning income. This removes the temptation of spending the money once they become 18 years old. Or you could set up a trust which owns the account with specific directions on how the money is to be used.
Fidelity
Since my 401Ks at work are through Fidelity, I use that for my other accounts such as IRAs and other brokerage accounts. Fidelity does not charge you anything to open an account. There is also no minimum required in any account. Plus they have four funds which have zero fees. Fidelity is competing with Vanguard so their other funds have comparable or lower fee structures than Vanguard. See Fidelity’s Mutual Fund Investing Ideas web page.
Invest When You First Start Working
If you are a young adult, start investing early. Open a Roth IRA and start investing. Invest in your employer’s 401K or similar program. The more you invest early in your career, the more you will have when you retire.
Invest More If You Are Older
If you are later in your career, you are simply going to have to invest more than a younger worker. You should save more than $5,000 a year. You can play around with the spreadsheet to see how much you need to save per year to achieve your goals at age 65, but obviously the more you save early, the more you will have later.
In the end, it is just plain simple math. The more you understand this math, the better choices and decisions you can make.
