A Dollar Saved is $19 Earned

A lot of people want to know WHEN they should start investing. Is it ok to wait, or is earlier better?

The following quote is generally attributed to Albert Einstein: “The Most Powerful Force in the Universe is Compound Interest*.” And while the statement is often used, its truth never diminishes. Truly the easiest way to secure a bright financial future is to put the power of compound interest to work as early as possible.

The more TIME we have for our investments to grow, the more money we will have when it is time to retire. While this is obvious to most, sometimes we all forget to apply it in our daily lives.

To illustrate the power of compound interest, think of something small that you purchase with some regularity. Do you buy a coffee or newspaper daily? Perhaps you chew gum or smoke? Are you a closet tabloid junkie? We all have our small pleasures and for the most part we don’t mind paying small amounts to get them. But what if our $1 cup of daily coffee actually cost $20? Would you buy it? Some people might, but most people would start getting their caffeine fix at home or at the office.

So how can a $1 cup of coffee cost $20? Well, let’s consider the opportunity cost of buying that daily coffee instead of investing that dollar. What would be the end result if we were to apply our daily coffee fund towards a tax advantaged portfolio compounding at 12% per year?

A 25 year old looking to retire at age 65 would end up contributing a total of $14,600 ($365 per year times 40 years). But when compound interest is put to work that dollar a day comes out to around $300,000 over 40 years! In other words, the future value of a dollar wisely invested now is 20 times more.

Next time you are at the store buying a pack of gum, ask yourself whether you would you buy that pack of gum if you knew it was costing you a dollar now and $19 in the future? You might decide you’d rather invest that dollar instead!

*While this quote and similar statements are generally attributed to Einstein, some scholars debate whether Einstein actually said these things.