An Investing Reminder: Time is Your Biggest Ally

While reading a piece on maximizing your 401k, I ran into this quote:

"The biggest influential factor is definitely when you start saving," says Josh McWhorter, president of Black Oak Asset Management in Cartersville, Ga.

Money you save in your 20s and 30s has decades of compounding ahead of it.

For example, a worker who saves $5,000 each year between ages 25 and 65 and earns 5% interest would have $634,199 in retirement. An employee who saved the same amount annually but didn't start until age 35 would have just $348,804.

Seeing this simply reminded me that maximizing the amount of time you invest is best way to maximize your investment return (something I detailed last spring.)

It wouldn't seem this way if you looked at all the financial press and TV. They are all focused on how to get the best investment return. Sure, it's better to have a 10% return than a 9% one, but you'll get better results if you simply focus on saving now and saving as much as you can. And fortunately, those two things are within your control -- earning a better return isn't.

Most of my investing strategy has been focused on socking away as much as possible as soon as possible. I've created a big gap between what I earn and what I spend so I have a decent amount to set aside each month. It gets automatically put into index funds without any action required on my part. I simply focus on keeping the fire stoked -- putting as much away as possible. After that, I let the index funds do their work and add what they can, but I'm not spending, nor am I willing (or able?) to spend, hours and hours each week to identify, buy, and manage investments that MAY earn me slightly more than what I already have. I'm focusing on what I think are the keys to investing success -- saving early and saving often!

Comments

[Learn Save Invest]

I'm 25 and I'm trying to save and invest as much money as possible right now. I try to tell my friends that time is going to be the biggest factor in our wealth, but many don't heed my advice.

Perhaps it's a generational thing. FMF maybe you have some ideas how to motivate younger people to invest?

[Money Reasons]

The hard part is getting started, especially if you are comfortable with your month spending stream for expenses...

I think when you first start a job, try to say at least 10%, then see how you can live on that for a while. Then the next year increase it by 1%, and so on...

[Holly]

I think that my husband and I understood at age 25 that saving early was important, but we just didn't realize HOW important it really was! But it was just so hard as a newly married, expectant couple on a single, unimpressive salary...we couldn't even afford the rent when he went into a different position and a cut in salary. After 2 years of marriage with a one year-old, we ended up moving back home w/my parents for a year to start on a better path.

We had read about this advice and each time we would just say, "Okay, we'll start saving in a few months when we have a better handle on our student loans, car loans, etc., etc." There was always an excuse.

My biggest wish for my own children is for me to be able to guide them in the right direction right from the beginning so they can avoid making those BIG financial mistakes. My oldest asks me to put half of all monetary gifts she receives into her savings account, so I do have hope!

Thanks for the post, FMF!

[FMF]

Learn Save Invest --

If I did, I'd probably be a lot wealthier. ;-)

I'm hoping that education (like what's shared on this blog) can make them see the light, but I'm not sure it will help.

[brooklyn money]

I started saving right out of college in a 401K that was then decimated a few years later by the dot.com bust, so while I agree saving early is important, allocation can also make a big difference in the lobster/cat food potential outcome during retirement.

[kt]

this is the same advice that super investors like warren buffett and benjamin graham give. Start investing as early as possible. It gives you more time to learn and make mistakes and move on. It also takes advantage of the fact that youth and risk are synonymous so a younger person is at better place to go into value investing than an older person who has more responsibilities.

[Budgeting in the Fun Stuff]

My husband and I got married a week after my college graduation. I started my "real" job two weeks after that.

As soon as they allowed me into the 401k plan (I was 22), we contributed enough to get the maximum company match (6%). I raised that to 15% within the next 2 years...then I was talking to a new coworker about personal finance and he mentioned and explained Roth IRAs. Hubby and I didn't make enough to simply open a Roth IRA too, so I took my 401k contribution back down to 6% and started fully funding a Roth IRA that year.

My husband has been contributing to his pension plan since he was 22 as well.

I'm hoping the extra few years we were able to start early makes a big difference. The market crashed a few years into it, but we shoveled even more money at it when it was cheap, so we are better now than before the crash.

My early retirement dreams are based on the power of compound interest, time, and diversification.

[Squirrelers]

Time value of money. Its a concept that needs to be taught to young people, as its application plays a big role in the financial success of people as they grow old. Make sure there is a gap between your earnings and expenditures, right when you start working. Invest young, allow the money to compound over the years.

If our schools teach about ancient history, foreign languages, etc - we should certainly teach about personal finances and the time value of money. Regardless, its probably a good idea for parents to teach these realities to our kids. If we teach them how to set the dinner table, we should certainly have the time to teach about personal finances!

[Matt]

Time only goes only so far. Buying when everyone is in a buying frienze and selling in a panic will wipe you out. I call this buying high and selling low. What you don't want to do.

Not a proper asset allocation is another. I know of to many people too close to retirement who lost a bundle over the past couple of years and now they can't retire or are forced to retire due to a lay off.

Yes starting early will compund your intrest and make you wealthier but foolish moves will do more damage.

[Tony]

While I doubt it would get younger folks to start invest, how exactly does it work?

I can understand it working when loaning money (CDs, savings, bonds), but how is it when doing stocks? Is the interest earned based off of dividends? Cost dollar averaging? Scheduled rebalancing?

[James]

compound interest is our friend. if you can get in the game early and keep you money there for a long period of time you can see great results that's the beauty of economics.

However what investments allow you to do this? you need a stock that goes up in price and also pays dividends.

what other investments allow you to get compounded interest over such a long time?

[Jason Walker]

I read a cool article somewhere many years ago where the author wrote a fake check for $1 million to his son who was in his teens with a note that said "Let's chat". When his son found him, he then explained how small investments could add up over time to be a million or multiple millions. Thought it was a clever way to get a teenagers attention.

[StackingCash]

Finally I'm beginning to see some people question the rate of return and compound interest miracle. Timing and asset allocation are keys to investing, unfortunately many don't realize this. I find it hard to believe that any financial adviser will mention that a rate of return could be negative. I think most people just pick stocks or mutual funds randomly in their 401k's and don't realize they can actually lose money. Do your homework!