This is another series of excerpts that The Epoch Times is publishing, from “The Young Adult’s Guide to Investing.” Hopefully this book will show readers of all ages that they should invest in certain funds that mimic the market (but only those funds that have little or no fees/expenses), as well as not to continuously trade in and out of a stock or fund to chase great returns.
Why Save?
The experts say that good saving habits can begin in children as early as three years old, so if you are old enough to read this, you are old enough to have some of these habits. Financial skills are one of the most important skills you will need to navigate your life, and those skills start with learning to save and budget.
Unfortunately, at least here in the United States, saving is not a part of most people’s behavior. Maybe it’s because they did not develop savings habits when they were young—so let’s change that.
Compounding
The sooner you start saving, the better off you’ll be. Not just because you will have saved more but because not only are you making money on your initial investment but you’ll also be making money on more money. How so?
Well, it’s called “compounding”—and it is the power of compounding that will make you lots of money. Compounding is when you make money on an investment, and that money is added to the original investment, which in turn makes even more money.
Let’s look at an example. If your rate of return is 10% per year on your original investment of $1,000, you make $100 per year. After three years, you have a total of $1,300.
But let’s say that each year you reinvest the $100 you made the prior year; after three years, you would have $1,331. This is because after the first year, the 10% return applies to $1,100 rather than just $1,000. And the second year, the 10% applies to $1,210. So, the total is $1,331.
An additional $31 might not sound like that much money, but what if we increase the numbers and use a real-life example by comparing two savers: One (let’s call him Chris) who starts saving when he is 20 years old and the other (we’ll call her Katie) who waits until she is 30 years old. Each one saves $100 per month until they are 60 years old. They both get the same annual rate of return of 8.5%.
Chris is smart. He read this book and started saving $100 per month when he was 20 years old and reinvests all earnings. When Chris is 60, he will have an astounding $406,825!
Katie ... well, she is not so smart. She didn’t start saving as early and waited until she was 30 years old. She saves $100 per month and also invests all earnings. When she turns 60, she will only have $166,339.
Chris actually invested only $12,000 more than Katie ($100 per month times 10 years), but has accumulated a whopping $240,486 more than Katie! That is the power of compounding. And the earlier you start, the more compounding can work for you. So start saving now! Seriously, start now.
FUN FACT #1: The power of compounding was said to be deemed the eighth wonder of the world by Albert Einstein.
FUN FACT #2: The “Rule of 72” is a quick method to determine how long it will take for you to double your money. You simply divide the return rate into 72. The result is the approximate number of years that it will take for your investment to double. Similarly, if you flip it by dividing the number of years within which you want to double your money into 72, the result is the approximate return you’ll need to earn to do so. For example, if you want to know how long it will take to double your money at 8% interest, divide 8 into 72 ... the answer is nine years.
This excerpt is taken from “Young Adult’s Guide to Investing: A Practical Guide to Finance for Helping Young Peo Le Plan, Save, and Get Ahead” by Rob Pivnick. To read other articles of this book, click here. To buy this book, click here.
The Epoch Times Copyright © 2023 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
