What is the Best Age To Invest?
According to value investors, like Warren Buffet, the secret sauce of finance can be explained in five simple words:
Investing is all about timing. The five simple words that contain the secret to investing like a billionaire are: The time value of money. While money doesn't exactly grow on trees, it does actually grow like a tree-a big, green, Christmasy [acceptable?], money tree. Yes, most people eventually learn the sheer power of savings and compound interest, but few people learn it early enough to use it wisely. After all, putting money away at an early age takes discipline-and let's face it, at 20 most people are more concerned about having a million in cold cash by 30, not 65. Still, if you want to find the easiest, most reliable way of retiring in true millionaire style, you need to know about the time value of money. We thought we'd share a simple well known compound interest example to make the point.
Sally and Harry
How Sally made over a million dollars by literally doing nothing, while her brother Harry worked like a dog!
Harry and Sally are twins. At 18 years of age, Sally gets a part-time job at a restaurant with good tips. By the end of the year, she's saved $2000, which she invests in a basket of financial assets that yield an annual return of 11% (stocks and bonds). The next year, and the year after, she adds $2000 each year so that on her birthday, at the year end of her twentieth year, she's invested $6000. In her 21st year, Sally goes to university and never invests another dollar. When Harry turns thirty, he lands his first well paying job and remembers Sally's investments. He invests $2000 on that year and every following year until he reaches 65 years of age, when he and Sally meet to compare returns.
Harry is certain he has been more disciplined than Sally and expects to have more money. But, when they compare their accounts, Sally has a balance of $1,037,700, which is larger by $187,800 than Harry's balance of $843,900. Moreover, Harry has invested $72,000-a 1072% return, but still a lot of money-while Sally invested only $6000 for a whopping return of 17,195%. While this example assumes an annual return of 11%, and the return of the S&P500 since inception is closer to 10% (7% after inflation), it still makes the point. If you truly want to take advantage of the time value of money, the best time to invest is before you reach the age of twenty.