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.
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%.
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.