There’s an old saying that goes something like this: The best time to start something was 25 or 30 years ago. The next best time? Now.
Of course, when we’re talking about money (And math) the earlier you start saving and investing, the better… but it really is never too late!
Time + ROI (Return on Investment) is a simple, but powerful formula in finance. The more time your money is invested, plus the higher your average annual ROI, the more money you will accumulate. Using a few simple examples, this becomes crystal clear! Let’s take a look:
Invest $1,000 per year for 40 years at an average ROI of 4.5% per year = $107,030.32 (Not bad!)
Now invest the same $1,000 for 45 years at an average of 6.2% return per year = $225,534.75 (A lot better!) More than double your money. In fact, your investment account increased by $118,504.43 !!
What changed? Not that much! We kept your money invested for 5 more years, and your average annual ROI increased by 1.7% That’s pretty sweet math. 🙂
The other critical variable we should talk about is: the amount of money invested; in this case $1000 per year. Yes, the amount matters! Let’s expand our examples:
We know that $1,000 invested per year for 40 years at 4.5% is $107,030.32 Now let’s invest $1,200 (A 20% increase) per year for 40 years at 4.5% This equals $128,436.39 Once again, a relatively modest increase in the amount of money invested per year increases your total portfolio by $21,406.07
Let’s review! Time + ROI + Amount Invested. All are super important. More importantly, every chance you get to increase any of the 3, you begin to exponentially grow your wealth and portfolio!
Please note: The “formula” (It is a formula) works in reverse too. 🙁 Whenever ROI, time or amount invested decreases, so does your growth. Also, your “formula” and wealth accumulation goes all to he** the minute any money is withdrawn from your investment.
The example I use most often in my class is: The $15,000 I withdrew from my RRSP to get a degree in education in 2001 has cost me approximately $60,000 in wealth. I.E. I would have approximately $60,000 more in my RRSP today if I did not withdraw $15,000 to go back to school. Of course, I don’t regret it; but from a strictly financial perspective, I’m out 60 GRAND!
I love doing “investment scenarios!” I have an entire section on my money blog dedicated to “money math,” ROI, the importance of time and the importance of the amount of money invested.