Thursday, July 1, 2010

The Cost of Waiting to Invest

Most people don’t put money to work over the years where it can work the hardest for them.

The average person will wait until they are at least 30 or older to start investing money for their future.

Let’s do a little experiment to demonstrate the powerful concept of the “Time Value of Money” and find out how much it really can cost you to wait to invest:

So, let’s suppose John, a 30 year old, was to make a one-time investment of $1,000.00 and let it compound monthly at 12% for 35 years – until he was 65. That would accumulate to $65,310.00.

Now, let’s see how much would have accumulated if he invested that same $1,000.00 for one time 10 years earlier at age 20. If the money was left alone to compound monthly at 12% for 45 years (still until he was 65), that would accumulate to $215,547.00.

John, simply by waiting 10 years – from age 20 to age 30 – to invest the same $1,000.00, would cost him $150,237.00.

So, let’s go back a little further. How much would John have made if he made a one-time investment of $1,000.00 ten years earlier – at age 10 – and left the money alone to compound monthly at 12% until he was 65? This would accumulate to $711,388.00.

So, waiting from age 10 to age 20, John’s cost for waiting to invest $1,000.00 would be $495,841.00.

But wait, it gets better (or worse depending on your point of view). If John had a one-time investment made for him when he was born for $1,000.00 and it was left alone to compound monthly at 12% for 65 years, this would accumulate to $2,347,857.00!

In this case the cost of waiting to invest the $1,000.00 from under 1 to age 10 would be $1,636,469.00!

If the investment was made as a Roth IRA then it would be Tax-Free money!

Since currently in 2010, the maximum you can contribute to a Roth IRA per year is $5,000.00, let’s look at the numbers if the one time investment would have been $5,000.00 instead of $1,000.00:
  • Age 30: $5,000.00 for 35 years @ 12% = $326,550.00
  • Age 20: $5,000.00 for 45 years @ 12% = $1,077,735.00
  • Age 10: $5,000.00 for 55 years @ 12% = $3,556,940.00
  • Under 1: $5,000.00 for 65 years @ 12% = $11,739,285.00
The cost of waiting to invest $5,000.00 over the various periods of time:
  • From age 20 to age 30: $751,185.00
  • From age 10 to age 20: $2,479,205.00
  • From under 1 to age 10: $9,260,080.00
Most intelligent people don’t know that they are potentially losing an $11,000,000+ Tax-Free opportunity for their children, over the time between their birth and age 30 – that can never be regained.

Final Thought: It is never too late to start investing. However, now that you know the incredible power of the “Time Value of Money”, I hope you realize that the sooner you start to invest the better!

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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