Time is your New Best Friend

What is the most important aspect of successful investing? Many people might say having a diversified portfolio, or a knowledgeable financial advisor,  or even lots of money. The people who say any of these are all wrong! Time is the most important factor when it comes to investing – that and what comes along with it: compound interest.  With investing your money over a long period of time, you are able to accumulate a lot of wealth.  The secret to this success (which isn’t a secret at all) is that you gain interest on the interest you acquired the year before.

Concrete Example

For compound interest, I think it is best to give a concrete example.  If someone gave you $10,000, what would you be able to do with it? Maybe buy a used car, put it towards a down payment on a house, buy a nice entertainment system, etc.  What would happen to that same $10,000 if you invested it?

Prepare to be shocked… If you invested the original $10,000 and didn’t touch it for 40 years, you would make a lot of money.  Assuming that you didn’t invest any more money and you received an 8% return (compounded yearly), you would have over $217,000.  That’s right – I didn’t make a typo and accidentally insert an extra zero. Check out the chart below that shows four different tracks. There is a line for: 0%, 2%, 5%, and 8%.

Why Wait?

Many people fail to start saving for retirement or other major purchases because they think they have lots of time. Don’t put off saving for your future for another day. If you start today, you can begin to fight against inflation. If you let your money sit idly by, you will regret it later.

22 Responses to Time is your New Best Friend

    • Thanks Paul. It would be nice if I had $10,000 at that age too. 🙂 It’s very practical to do the same thing 5-7 years later (even with going to college).

  1. It’s amazing how compounding works, just plug in a few numbers into a calculator and see the number grows before your eyes. Too bad not a lot of people have the kind of discipline needed to pull it off.

  2. Time is your best friend and also your worse enemy. That’s why it’s best to start investing as early as possible. When you are old, it will be difficult to invest and you won’t be able to catch up.

    • Yes, absolutely. It doesn’t sound like a lot, but when you can visualize it, it helps illustrate it so much more.

  3. What would have been much more appropriate to see is a chart showing how much you’d have investing for 40 years (say ages 25-65) over 20 years (45-65) at the same interest rate. Although the amount of time between the first and second is doubled, the amount of money is significantly higher for the early starter, and that’s why compound interest is what it is.

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