Many investing gurus talk about the power of compounding, saying that you should start investing early and compound. But I did not do that, even though one specific financial advisor was trying hard to have me buy from her.
As a youngster, I started working full time after college. Though many people dread this moment, I was, actually, looking forward to it. I saw that I was going to have some real money to spend, relatively little expenses. I was finally about to do something that was useful for somebody. And finally (!!!) finally — it was the end of endless homeworks, assignments and many hours of useless wasted time.
As you can imagine starting out of college with little practical experience, my salary was not amazing. And I was not very lucky with the company either. It was a small company where the owner was intimidating almost everybody and the mood of us there was often worry and anger.
I started looking for an escape. One option was investing, and as a friend of mine listened to me, he suggested I meet his friend — a financial consultant.
So I agreed. I admit, I was feeling a bit excited. Finally, somebody who will understand my needs and help me on my path to riches — whatever it was — millions, 10s of millions, billions. Back then, I did not see there much difference.
With expectations high and a clear vision of me as a millionaire in a month, worst case, next January, I came to the meeting.
The person was very nice. She had a presentation that was absolutely amazing — and yes, there was the private yacht as well (I did not even know I could want something like that at such a young age). So I saw myself there already, my path to the rich club.
Unfortunately for me (or for her), I also knew how to count. So when she asked me about my income, and how much would I be ready to invest monthly, I replied honestly. She promised to prepare a plan specifically for me.
Amazing! I left the meeting with clear goal to quit my job the very next day and start planning the trip around the world.
When the plan came, I saw that forgetting to quit my job was a great idea. With my option to invest $100/month, I would see an amazing fortune of about $20,000 in my 30s and something more later on. I immediately saw we were not speaking the same language.
I was quite good at several things and believed that if I push just a little bit, I can be saving that kind of money per year no problem in my 30s. And maybe more.
My idea was, with an extra $100 per month in my 20s, I can have a lot of fun (back then it was more money). I can save a bit and travel, I can go out, I can eat out quite well a couple of times. Probably things I would miss in my 30s much more than an extra $20,000.
As it turns out, up till now, I was quite right. At the end I even managed to burn through $40,000 in savings in my late 20s and I do not feel sorry about that. It prepared me for much better opportunities, gave me valuable lessons and as I read in a Millionaire book, supported my millionaire mind. The idea is that you just burn part of your money on something that you enjoy, we could say something that sparkles your soul. This was you will feel much better sitting there in the office and making more money.
And not to forget — I had fun. I saw cities, traveled to fun destinations, ate great food with friends. And much more. I would not trade that for an extra $20,000 in savings.
But let me go through a few numbers so you see what I mean. I will also share how I am doing now.
First, let’s say I started investing $100 / month at the age of 20. And let’s say I invest in stock and manage to get a smooth 5% growth.
When I read this kind of calculations, I see people use something between 5% and 8%. We must consider the inflation, so let’s use 5%.
As table left illustrates, I will be at $17,840 at age 30.
You might say, $20,000 is not much, but let’s compound it to the age of 60. At 60 I would be at $86,439. This is a different number. For a 30 year old, $86,000 is quite nice, I would definitely be happy to have that extra money available right now. And it would make a difference for me.
But as a 60 year old, I am not there to buy a new flashy car. Not, if I am counting on $80,000. I want to live off that money.
With $80,000 I could be really frugal, spend $25,000/year and live for 4 years. Nice, but I hope not enough years.
I could invest and live off the dividends / interests. These are really low these days, say 3% / year. That would give me $2,400 / year as an income, that is $200 / month. Sorry, not much.
Most people I read agree, that you need $500,000 as a totally bare minimum and rather $1,000,000+ at sixty to feel safe about your retirement. $80,000 will not make that much of a dent if you target $1,000,000. If you target $500,000 the $80,000 makes a difference. But then you probably did not make much of a progress in your income in your 30s.
If you expect to earn modestly in your 20s, and the same modest income all the way up to your 60s, then you probably should start saving early and even $100 / month is a good saving.
Now it gets interesting. I had my roaring 20s, and now I arrive in my 30s, have a decent income and start saving. Let’s say it is just $1,000 / month.
With just this investment (and if you are making good money, you invest more) and with 5% annual growth, I am at $797,266 by the age of 60. In many areas this is an amount you can retire with. Not much of a magic and I will probably be counting beans, but I should have food and a place to live.
Btw, this is a big simplification to illustrate my point. You will probably do safer investments in 50s with lower growth and more aggressive investment in 30s expecting higher growth.
So how can we grow the money more?
First, the more years you have, the more the money grows. In theory, you are making the biggest jumps in the last few years. So if you are able to start making good money earlier and invest more, definitely do it. This can make a difference. But my experience is that spending 5 more years in some training or some low payed intern position and then having the money come, for me it was ok not worry about investing in those 5 years.
The numbers for these extra investments are easy — if you invest 5% / month more, you get 5% more out.
But there is one thing I noticed while making these tables. The thing that can really make a huge difference, is just a small percentage in annual return on my portfolio. If I just go from 5% to 6%, I have an extra $150,000 at the age of 60 (table left). If I add just 0.5% more, I am at a million and if I were able to compound at 7%, I am at $1,133,529. Now that is a huge difference.
And that is why I started this blog. To help finding investments that give better returns and that ultimately improve portfolio results substantially.
As a last note, I read that Warren Buffet, the famed investor, was able to compound at an average 20% a year in his Berkshire Hathaway. Not sure whether it is true, but that is what I read made him so rich. These extra 15% a year, between a regular portfolio and a portfolio growing at 20% does not sound much. But it is a differnce between having money to retire and retiring in style. It is a $13,000,000 difference in the last row of table below.
To wrap up, if I expected to earn a steady income through my whole working life, I would have started investing early. But because I started in a low pay job and wanted to enjoy my life, I lived better and started to invest later.
I have to warn you to be careful about this, in my opinion at the age 30, there is still time for an investment to grow and compound. But at the age 40, it gets dramatically worse and there is very little time to grow and compound. Use your good judgement and own calculations with your money.
If you start to invest, read about and study the market. Remember, that a steady 5% per year is a theory. In practice some years are great with 20% or 30%, many are around 3% or 4% and some are negative. Be prepared for that and allocate your money wisely.
How about me? It is working quite good now. I am approaching my 40 and am on track with my finances according to the table.
So good luck.
Shall all your investments be profitable.
In bullandbearlist.com we build tools for regular people to search for such high potential companies. Please note that all investments entail risk and these are just my opinions, not a professional financial advice. I am not a professional financial advisor. I am sharing this because I think others might find the info interesting.