Why Starting Early is Key
The earlier you start investing, the more time your money has to grow through compounding. To illustrate the importance of time, consider two investors:
- Investor A starts saving $5,000 a year at age 25 and stops after 10 years, investing a total of $50,000.
- Investor B starts saving $5,000 a year at age 35 and continues for 30 years, investing a total of $150,000.
Even though Investor B contributes more money, Investor A ends up with more wealth at age 65. Why? Because Investor A’s money had an additional 10 years to grow through compounding.
This example highlights the importance of time over the amount invested. The longer your money has to grow, the less you need to invest to reach the same financial goals.
Harnessing the Power of Compounding in Different Assets
Different types of investments offer various ways to take advantage of compounding:
Stocks: When you invest in dividend-paying stocks, reinvesting those dividends allows you to compound your returns. Over time, this can lead to significant growth in your portfolio.
Bonds: Fixed-income investments like bonds pay interest that can be reinvested, further compounding your earnings.
Mutual Funds and ETFs: Many mutual funds and exchange-traded funds (ETFs) automatically reinvest dividends and capital gains, allowing your investment to grow through compounding.
Savings Accounts: Though interest rates on savings accounts tend to be lower, compounding interest still works to grow your balance over time, especially if you regularly contribute to the account.