Novice Investing - Why Invest Now?

Date: Thursday 07th 2008f August 2008 01:43:06 PM

Why invest now? - 05/31/2005

By: Novice Investing Staff

The hardest thing to do with money...

Investing now is the hardest thing to do for most of us but the reason is not because we don't have enough money. We have shown on the value of one dollar that we can save a lot of money. If you still can't think you can save anything, we encourage you to read that article again.

A lot of people would think that they would start investing later when they are ready. Whatever 'ready' is, I feel that it is the wrong approach in the part of those people. Why? The answer is the power of compounding.

Let us make a hypothetical situation about two individuals; Joe and Jane. They were both 22 years old when they finish college. Joe is a cautious person. He does not want to start investing until he is ready. When he graduate from college, he made plans. He would learn to invest for several years and then start putting money aside after he is comfortable with investing. Joe is also a fairly hard-working person. He would keep saving from the moment he invest until the moment he retire at age 65. As it turns out, Joe finally take the plunge in investing at age 28; 6 years after he graduate. He diligently put $3000 a side a year out of his meager salary to invest. He continues doing that for 37 years until he reaches 65. Through ups and downs, Joe manage to match the market index return of 10.5 return compounded annually.

Let's now consider Jane. She is a cautious person too. But she is knowledgeable as well. She knows that by investing in index fund, she would get a 10.5 % annual compounding return if history is any guide. So, fresh off college, Jane started putting money aside for investing. She invests $1,500 every six month of her meager salary. However, after reaching the age of 30, she decide that she wants to enjoy life quite a bit. She stops contributing her $3,000 a year and use it for her annual vacation trip.

Which one do you think would come ahead? Joe who pours his whole heart into investing and never stop saving until he retire? or Jane who invest immediately in index fund and stop contributing after she is 30 years old?

Ready for the answer?

Name	Age
Name	22	23	28	29	40	50	65
Joe	$ 0	$ 0	$0	$3,315.00	$67,057.86	$230,974.20	$1,131,935.90
Jane	$ 0	$3,078.75	$24,224.11	$29,913.16	$98,291.08	$266,769.94	$1,192,809.42

Wow! Jane who saves for a mere 8 years, manages to beat Joe who set money aside until he is 65. What is happening here? Compounding is clearly working its magic here. By starting early, Jane has a huge head start and she let compounding do its magic later on. Just like saving a dollar a day will adds up, so does starting early will. The faster you start, the better it is. The higher the amount you save early on, the more money you will have when you retire.

You think you can start saving now?

The message is clear. Start now and save as much as you can early. Are you a lazy person? I am. So, start early and you only have to invest for another 8 years to get to the same result as your friend who start 6 years later.

So, what are you waiting for? Start now. If you don't know how, then learn some investing basic here. As stated in this article here, there is no excuse for not having enough money to save.

END

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]