I was working with some calculations the other day and something became ridiculously apparent to me. You and I (along with almost anyone) literally can’t afford to wait to start investing and savings.
Calculating Contribution and Investing Returns
I think a very simple example will provide evidence that you need to start contributing, investing and saving yesterday.
Person A vs. Person B
- Both are 22 years old
- Person A decided to contribute $2,000 for the first 10 years of his or her working life to any type of investment vehicle you can think of. Person A inexplicably stops after the first 10 years. Not sure why they would but its just an example.
- Person B thinks that he is unable to afford the contributions and says I’ll wait. He does wait but at the ripe age of 32 decides now is the time and invests that same $2,000/yr for the next 33 years.
- They invest in the exact same stocks, bonds, mutual funds, etc and receive 6% after tax linear growth until retirement at 65.
So Person A put in $20,000 and Person B put in $66,000 – who will have more money?
Person A
Age | BOY Balance | Contribution | Growth | EOY Balance |
22 | $0 | $2,000 | $120 | $2,120 |
23 | $2,120 | $2,000 | $247 | $4,367 |
24 | $4,367 | $2,000 | $382 | $6,749 |
25 | $6,749 | $2,000 | $525 | $9,274 |
26 | $9,274 | $2,000 | $676 | $11,951 |
27 | $11,951 | $2,000 | $837 | $14,788 |
28 | $14,788 | $2,000 | $1,007 | $17,795 |
29 | $17,795 | $2,000 | $1,188 | $20,983 |
30 | $20,983 | $2,000 | $1,379 | $24,362 |
31 | $24,362 | $2,000 | $1,582 | $27,943 |
32 | $27,943 | $2,000 | $1,797 | $31,740 |
33 | $31,740 | $0 | $1,904 | $33,644 |
34 | $33,644 | $0 | $2,019 | $35,663 |
35 | $35,663 | $0 | $2,140 | $37,803 |
36 | $37,803 | $0 | $2,268 | $40,071 |
37 | $40,071 | $0 | $2,404 | $42,475 |
38 | $42,475 | $0 | $2,549 | $45,024 |
39 | $45,024 | $0 | $2,701 | $47,725 |
40 | $47,725 | $0 | $2,864 | $50,589 |
41 | $50,589 | $0 | $3,035 | $53,624 |
42 | $53,624 | $0 | $3,217 | $56,841 |
43 | $56,841 | $0 | $3,410 | $60,252 |
44 | $60,252 | $0 | $3,615 | $63,867 |
45 | $63,867 | $0 | $3,832 | $67,699 |
46 | $67,699 | $0 | $4,062 | $71,761 |
47 | $71,761 | $0 | $4,306 | $76,066 |
48 | $76,066 | $0 | $4,564 | $80,630 |
49 | $80,630 | $0 | $4,838 | $85,468 |
50 | $85,468 | $0 | $5,128 | $90,596 |
51 | $90,596 | $0 | $5,436 | $96,032 |
52 | $96,032 | $0 | $5,762 | $101,794 |
53 | $101,794 | $0 | $6,108 | $107,902 |
54 | $107,902 | $0 | $6,474 | $114,376 |
55 | $114,376 | $0 | $6,863 | $121,238 |
56 | $121,238 | $0 | $7,274 | $128,513 |
57 | $128,513 | $0 | $7,711 | $136,223 |
58 | $136,223 | $0 | $8,173 | $144,397 |
59 | $144,397 | $0 | $8,664 | $153,061 |
60 | $153,061 | $0 | $9,184 | $162,244 |
61 | $162,244 | $0 | $9,735 | $171,979 |
62 | $171,979 | $0 | $10,319 | $182,298 |
63 | $182,298 | $0 | $10,938 | $193,236 |
64 | $193,236 | $0 | $11,594 | $204,830 |
65 | $204,830 | $0 | $12,290 | $217,120 |
Person B
Age | BOY BALANCE | Contribution | Growth | EOY Balance |
22 | $0 | $0 | $0 | $0 |
23 | $0 | $0 | $0 | $0 |
24 | $0 | $0 | $0 | $0 |
25 | $0 | $0 | $0 | $0 |
26 | $0 | $0 | $0 | $0 |
27 | $0 | $0 | $0 | $0 |
28 | $0 | $0 | $0 | $0 |
29 | $0 | $0 | $0 | $0 |
30 | $0 | $0 | $0 | $0 |
31 | $0 | $0 | $0 | $0 |
32 | $0 | $0 | $0 | $0 |
33 | $0 | $2,000 | $120 | $2,120 |
34 | $2,120 | $2,000 | $247 | $4,367 |
35 | $4,367 | $2,000 | $382 | $6,749 |
36 | $6,749 | $2,000 | $525 | $9,274 |
37 | $9,274 | $2,000 | $676 | $11,951 |
38 | $11,951 | $2,000 | $837 | $14,788 |
39 | $14,788 | $2,000 | $1,007 | $17,795 |
40 | $17,795 | $2,000 | $1,188 | $20,983 |
41 | $20,983 | $2,000 | $1,379 | $24,362 |
42 | $24,362 | $2,000 | $1,582 | $27,943 |
43 | $27,943 | $2,000 | $1,797 | $31,740 |
44 | $31,740 | $2,000 | $2,024 | $35,764 |
45 | $35,764 | $2,000 | $2,266 | $40,030 |
46 | $40,030 | $2,000 | $2,522 | $44,552 |
47 | $44,552 | $2,000 | $2,793 | $49,345 |
48 | $49,345 | $2,000 | $3,081 | $54,426 |
49 | $54,426 | $2,000 | $3,386 | $59,811 |
50 | $59,811 | $2,000 | $3,709 | $65,520 |
51 | $65,520 | $2,000 | $4,051 | $71,571 |
52 | $71,571 | $2,000 | $4,414 | $77,985 |
53 | $77,985 | $2,000 | $4,799 | $84,785 |
54 | $84,785 | $2,000 | $5,207 | $91,992 |
55 | $91,992 | $2,000 | $5,639 | $99,631 |
56 | $99,631 | $2,000 | $6,098 | $107,729 |
57 | $107,729 | $2,000 | $6,584 | $116,313 |
58 | $116,313 | $2,000 | $7,099 | $125,412 |
59 | $125,412 | $2,000 | $7,645 | $135,056 |
60 | $135,056 | $2,000 | $8,223 | $145,280 |
61 | $145,280 | $2,000 | $8,837 | $156,116 |
62 | $156,116 | $2,000 | $9,487 | $167,603 |
63 | $167,603 | $2,000 | $10,176 | $179,780 |
64 | $179,780 | $2,000 | $10,907 | $192,686 |
65 | $192,686 | $2,000 | $11,681 | $206,368 |
Yup, Person A has a larger balance ($217k vs $206k). It is easy to get into the details, and fall victim of paralysis by analysis, but one of the basic points of personal finance is that regardless of the synonym you want to use (investing, contributing, savings, etc.) it should have started yesterday.