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The Time Value Of Money and The Benefit of Investing Early.

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Aug 25

Time.

It’s the single most valuable thing we all have and the only thing in the world that you can’t buy more of.

If you’re just starting out on your career then starting a pension might not be a big priority.

But the thing to realise is that time is the single biggest investment advantage you have so it’s important to use it if you can.

That’s because time and compound interest are the two secret ingredients to retiring wealthy.

To illustrate this, here is a story of 3 fictional investors. Evan, Sarah & Will.

This illustration shows how each person fared by 65 based on when they started investing.

  1. Evan invested €1,500/month from age 20 and then stopped completely at 26. He invested a total of €108,000 into his pension by that time.
  2. Sarah invested €1,000/month from age 20 and then stopped completely by age 30. She invested a total of €132,000 into her pension by that time.
  3. Will only started investing €1,000/month from age 31 but he continued investing this amount for the remaining 35 years of his career. He had invested a total of €420,000 by the time he hit 65.

So who do you think retired the biggest pension fund given that they all had the exact same 6% return?

Well you might just be surprised at the results.

The Value of Starting a Pension Early in Your Career

Compounding Returns

Evan stopped investing at 26 and left his accumulated €133,089 fund to grow over the remaining 40 years at 6%. As a result his final pension fund matured at a whopping €1,368,917.

Compound interest and Time worked together here to deliver him an ROI of 1268%!

That’s the time value of money in action.

The longer the timeframe the greater the theoretical benefit of compounding returns.

A nice result for him nonetheless.

Sarah invested a total of €132,000 over the first 11 years of her career stopping at 30.

She left her accumulated balance of €190,439 to grow at 6% p.a. over the next 35 years. This magically consistent investment strategy netted her a €1,463,733 fund.

She had a slightly smaller ROI of 1109% but still benefited enormously from time and compound interest working together.

She was the clear winner in terms of fund size.

Will amassed the second largest fund of the three at €1,417,450.

However, because he started 10 years later, he Did not have the same time for compound interest to work.

His ROI was 337% and he ended up having to contribute much more than the others to have an equivalent fund.

In fact he had to invest 3 to 4 times more .

Granted, this is a simplified mathematical model 😉.

However the point is that there is a time value of money so it pays to use it to your advantage when you can.

It works against you if you don’t so stop thinking about starting your pension and just start it today.

Drop me a mail if you want to discuss your situation or give me a call on 01 442 3929.

Kevin

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