May 15, 2020

Investing Principle #2: Time

There is an old proverb that states, the best time to plant a tree is twenty years ago, the second-best time is now.

When it comes to retirement or any long-term financial goal, time is money. If you are in good health when you retire, there is a good chance you will live well into your 80’s and beyond. It is possible that you will be in retirement longer than you worked. And Social Security will only replace about 35-40% of your income, the rest will need to come from you. The sooner you can invest, the longer your money has to grow. Even a few years can make a big difference.

We all know that investing includes some risk, even loss of principle, but consider this example:

Investor A
Saves $100 a month from age 21 to age 30 (9 years) for a total contribution of $10,800 and then stops investing.

Investor B
Saves $100 a month from age 30 to age 65 (35 years) for a total contribution of $42,000.

Assuming an 8% return for both investors:

Investor A
At age 65, they would have $231,047

Investor B
At age 65, they would have $215,635

Even though Investor B invested 4 times as much as Investor A, Investor B ends up with $16,000 less! The reason is time.