I was 22 years old and weeks into my first job out of college working for a tiny ad agency in New York. One duty that I hated was opening the owner’s mail and separating it into piles of things that needed to be addressed immediately and items that could wait.
I stayed at that job for only six months before moving on to bigger and better things. But I thank my lucky stars that I was assigned that menial task because the contents of one envelope literally changed my life.
It was an issue of Richard Russell’s Dow Theory Letter, one of the earliest investment newsletters. It wasn’t a forecast of whether the market would go up or down or an individual stock pick that hit me like a hammer, but a simple concept on page three that altered the course of my life.
At the time, I was making the princely sum of $18,000 a year, paying rent in Manhattan, and hoping there’d be enough cash left over at the end of the week to be able to go out on weekends. I ate a lot of pasta with butter during the week to make sure there was beer money for Friday and Saturday nights.
The article stated that if I invested $2,000 a year starting at age 21 (close enough) and stopped at age 31, I’d have more money at 65 than I would if I had started at 31 and invested all the way up until 65.
In other words, if I started right away, I could invest a total of $20,000 and have more than if I waited 10 years and invested $68,000—more than three times the amount. That’s the power of compounding.
That was a few decades ago, and that $2,000 example was the maximum contribution allowed for an IRA at the time. Let’s move to 2019, where the maximum contribution to an IRA for someone under the age of 50 is $6,000. If you’re over 50, you can contribute an additional $1,000.
If someone contributes $6,000 per year from ages 21 to 31, earning 9.8% per year (the average historical total return of the S&P 500 over the past 90 years) until age 65, their nest egg will be worth more than $2.8 million. If they start at age 31 and contribute every year until age 65, they’ll have almost $1.7 million. By waiting 10 years, they miss out on nearly $1.2 million!
What happens if you wait until you’re 40 years old to get serious about saving and investing? The number drops dramatically to $690,895.
Oh, and if that smart 21-year-old continues to invest $6,000 every year instead of stopping at age 31, they will have more than $4.4 million.
I realize that not every 22-year-old is in the position to save $6,000 per year. I also know that many people are well past 22 years old and haven’t started saving and investing yet, or haven’t been able to set enough aside.
But the example illustrates how crucial time is in investing for the future. The longer you can let your money grow, the more money you are likely to have. Time is likely more important than which investments you pick.
Reading the example in Russell’s Dow Theory Letter ignited my interest in the markets. And if this former 22-year-old could scrimp and save $2,000 per year on an $18,000 salary, anyone can.
If you haven’t started investing, the clock is ticking. Get started now.