Why Invest with Time is Important?
Have you ever wished that you could have more money, without all the effort? Or are you concerned you won’t have enough saved for retirement or your child’s education?
Luckily, there’s actually a simple way to accomplish those things if you’re willing to learn how to put your money to work for you. It’s called compound interest, and it can help you exponentially grow your wealth.
WHAT IS COMPOUND INTEREST?
Compound interest can be defined as interest calculated on the initial principal and also on the accumulated interest of previous periods. Think of it as the cycle of earning “interest on interest” which can cause wealth to rapidly snowball. Compound Interest will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.
Not only are you getting interest on your initial investment, but you are getting interest on top of interest! It’s because of this that your wealth can grow exponentially through compound interest, and why the idea of compounding returns is like putting your money to work for you.
WHY IT’S IMPORTANT TO SAVE NOW
The magic ingredient that makes compound interest work best is time.
The simple fact is that WHEN you start saving outweighs how much you save.
An investment left untouched for a period of decades can add up to a large sum, even if you never invest another dime.
Let’s see how compound interest works with an example. Below, Ann and Ben experience the exact same 9% annual investment return on their retirement funds. The only difference is when and how often they save:
- Ann invests RM6,000 per year (RM500 per month) beginning at year 2005. She stops after invested for 10 years which her capital amounted to RM60,000 in total.
- Ben invests the same RM6,000 but begins where Ann left off. He begins investing at year 2015 and continues the annual RM6,000 investment until he retires in year 2045. Ben has invested for 30 years and RM180,000 total.
Ben has invested 3 times as much as Ann, yet Ann’s account has a higher value. She saved for just 10 years while Ben saved for 30 years. This is compound interest: the investment return that Ann earned in her 10 early years of saving is snowballing. The effect is so drastic that Ben can’t catch up, even if he saves for an additional 20 years.
Compound interest favors those that start early, which is why it pays to start now. It’s never too late to start — or too early.
If you are early in your career, it can feel like there are a lot of things competing for your money between student loans, saving for a house, retirement and more. However, start investing now can give you a huge edge on your finances so you can retire with passive income. Also, if you are saving for your child’s education, the power of compound interest surely applies. Start investing when they are in diapers and not as they are starting their college search.
GET STARTED
If you want to easily accumulate wealth and take advantage of the magic of compound interest, it’s important to start early and be consistent. As you can see in the example above, it’s possible for your money to grow to a large sum with a small initial investment. If you consistently invest with strategy, you’ll have a portfolio by the time you retire.
To get started, check out the Money Tree
