A big misconception about investing is that it takes a lot of money to make a lot of money. What it takes is some money and a lot of time. Time is a crucial component to investing.
The time value of money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
Therefore, the sooner you start investing, the more money you can earn.
Jack and Jill
Let’s illustrate by comparing two examples:
Jill starts saving $200 a month at age 25. Jack starts saving that same $200 a month, but not until age 45.
Using average annual returns of 5%, by age 65 Jill will have $305,000 (of which $96,000 was her own money). Jack will have $82,000 (having used $48,000 of his own money). While the amount of money invested by Jill was double that of Jack, the amount it has grown to is almost 4 times that of Jack.
Is Time on Your Side?
While having a lot of money is useful for investing, this is not necessarily the key to making a lot of money. While some say it is never too late to start saving and investing, it is clear that the earlier you start saving, the more time your money will have to grow.
~ The Savvy Saver