When I read about FIRE, it did seem like a lot of work to me. All the accounts I had to think about, investing, insurance policies and planning that had to come together to get to my goals. And like any other uni kid, I set it aside and procrastinated for a while.
After all, I had plenty of time right? I was only 21 after all. Why did I need to start financial planning now?
Well, not really.
As I procrastinated, I was missing out on the greatest tools available to build my wealth.
Time is our greatest asset as youths.
Time is the Greatest Asset
Most people, investors or not, will have heard of Warren Buffett in some capacity and most would be aware of his reputation as one of the greatest investors of our time. But what many people often do not discuss, is actually how long he has been investing.
Warren Buffett (1) took an interest in business at a young age and was blessed to have been exposed to the stock exchange at a mere age of 11, where he bought his first shares of Cities Services Preferred in 1941 (2) (likely through his father, Howard Buffett (3), who was a congressman). This means that to date, Warren Buffett has been investing for close to 80 years.
This is not to discredit his investing prowess or business acumen, after all, Buffett’s Berkshire Hathaway has boasted returns of 17.1% annually since 1985. But it is important to acknowledge the time he had on his side to accomplish what he has done.
What’s so important about all that time though?
I’m sure compound interest is a term that most of us are familiar with. It is the interest that is computed on the principal and the interest that has accumulated thus far.
Applying a similar concept to investing, growth in investing compounds on itself. For example, an $10,000 investment in an S&P 500 ETF that grows 7% every year. Due to compounding of his investment, the value of his investment does not go up by just $700 every year (7% of the original $10,000). Instead, from Year 2 to 3, the increase has increased to $801!
Following this train of thought, starting young, we can accumulate a much larger investment portfolio with less starting capital if we let our investment compound over a long period of time.
Enjoying the content?
As we can see, in the 20th year, the investment gains a total of $6,116, which is more than 3.6x more than in the first year returns of $700!
Not convinced yet?
Take an example of two friends, Thomas and Jeremiah. Both graduated from uni at 25 and fortunately managed to get a job straight out of school.
Jeremiah, knowing his goal was set on financial independence, decided to commit to saving up $10,000 per year, to invest into an S&P 500 ETF. After working hard for 10 years, he took his foot off the pedal and stopped investing at age 35.
Thomas, on the other hand, wanted to ‘live his best life’. He travelled extensively and cruised through his 20s without thinking much about saving up much. When he was 35, he decided it was time to get serious with his finances and managed to save up $10,000 to invest into an S&P 500 ETF every year.
Guess where they ended up? And more importantly, when did Thomas catch up with Jeremiah?
Assuming a 7% return on their investments, Thomas only overtakes Jeremiah when they are at the ripe old age of 69. And Jeremiah has not even contributed a single cent to his investment since the age of 35! Wild, isn’t it?
This is the power of compounding working with time.
In fact, if you saved $10k per year for 30 years, gaining 7% returns every year, your total amount invested would be $300,000 ($10k * 30 years), but your total investment value would be $944,608!
Being Young Is Your Superpower!
Being young, we have the powers of compounding and time to work their magic. It may seem like there’s a long road ahead and plenty of time to get started, but the earlier you get started, the easier this ride will be for you. Looking at the previous example, from a different perspective: How much would you need to save every year to get to an investment value of $1,000,000 if your time horizon was different?
*Assuming a 7% return on investment annually
The task is much easier if you start early and let compounding and time do the work for you.
Be like Jeremiah. Start your financial journey today.
Photo by Jeremy Bishop on Unsplash