May 26, 2016

Principle 16: Do Not Delay, Start Investing Now

 I don’t think anyone has one defining moment or conversation that led them to begin investing.  For me, I began developing an interest in long-term investing after exploring career paths.  My first real exposure to the concept of investing came in the form of an unpaid internship at a boutique sized investment bank in Los Angeles.

Hours upon hours were spent inputting data into excel spreadsheets and creating charts and graphs for marketing presentations.  Lunch breaks at my desk and heading home at 7pm quickly became the norm.

There was a silver lining came at the end of each day though.  The asset manager I was interning for would take me aside into the client entertainment room for a game of pool and a draft beer.
I know… not too shabby.

This veteran of the industry gave me several reading assignments each month, and we’d always take the time to discuss my findings.  Ben Graham’s The Intelligent Investor, Bill Schultheis’ The Coffeehouse Investor, and The Four Pillars of Investing by William Bernstein are a few of the titles I remember.

I’m very grateful for the time my boss took to share these books with me, as they really ignited a passion I never knew I had.  Not to get rich; although that’s a nice byproduct.  The real passion that was ignited within was a desire to become financially independent, or no longer reliant on an employer.

One of the “gems” he would constantly remind me of was to START NOW.  “Put anything you can away RIGHT NOW.  Gather up $1000 and throw it into a target date retirement fund at Vanguard, and focus on nothing more than increasing the % of your total income saved over time.  Build your net worth ALWAYS.”

He was a very successful asset manager, and I’m sure he was near the top of the industry in his line of work, but he’d always remind me that you need to focus on “saving now, and saving as much as you can afford.”

It wasn’t until I reached my mid-twenties that I realized that dollars stash into retirement accounts in the early part of your career are FAR MORE valuable than dollars invested later in life.

Let’s take a look at an example of a 25 year old investor that puts $5000 into an IRA each year until he turns 35, and not a dollar more.  We’ll compare that result to 35 year old investor that doesn’t begin funding an IRA until age 35, where he begins contributing $5000/year until age 60.  You might think that the 35 year old investor contributing to their IRA for 25 years would end up with far more than the 25 year old investor doing this for only 10 years, but let’s take a look at what happens when compounding increases an investor’s returns over time:

Begin at 25/8% Return

Begin at 35/8% Return
Age
Investment
IRA Balance

Age
Investment
IRA Balance
25
$5,000
$5,400

35
$5,000
$5,400
26
$5,000
$11,232

36
$5,000
$11,232
27
$5,000
$17,531

37
$5,000
$17,531
28
$5,000
$24,333

38
$5,000
$24,333
29
$5,000
$31,680

39
$5,000
$31,680
30
$5,000
$39,614

40
$5,000
$39,614
31
$5,000
$48,183

41
$5,000
$48,183
32
$5,000
$57,438

42
$5,000
$57,438
33
$5,000
$67,433

43
$5,000
$67,433
34
$5,000
$78,227

44
$5,000
$78,227
35
$5,000
$89,886

45
$5,000
$89,886
36
$0
$97,076

46
$5,000
$102,476
37
$0
$104,843

47
$5,000
$116,075
38
$0
$113,230

48
$5,000
$130,761
39
$0
$122,288

49
$5,000
$146,621
40
$0
$132,071

50
$5,000
$163,751
41
$0
$142,637

51
$5,000
$182,251
42
$0
$154,048

52
$5,000
$202,231
43
$0
$166,372

53
$5,000
$223,810
44
$0
$179,682

54
$5,000
$247,115
45
$0
$194,056

55
$5,000
$272,284
46
$0
$209,581

56
$5,000
$299,466
47
$0
$226,347

57
$5,000
$328,824
48
$0
$244,455

58
$5,000
$360,530
49
$0
$264,012

59
$5,000
$394,772
50
$0
$285,132

60
$5,000
$431,754
59
$0
$569,981




60
$0
$615,580




Total Investment:      $55,000

Total Investment: $130,000
Portfolio Value:         $615,580

Portfolio Value: $431,754 

As you can see, the aggressive youngster that decided to skip morning coffee runs and expensive bar tabs ended up with a 30% larger nest egg than the investor that delayed until the age of 35.

Now I know many people in their 20s are focused on other priorities, and that’s fine.  Getting married, paying off student loans, buying a car, and saving for a down payment are all expensive and deserve our full financial dedication.

But what if we decided to take the frugal path, and route money that might have gone toward a lavish wedding and honeymoon, or a brand new car into our retirement accounts?  I know several people that paid less than $250 for exchanging vows at the county courthouse and later enjoyed a potluck barbeque with family saving over $20,000!

Buying a new car is one of the most expensive mistakes many people make.  By buying a 2 to 3 year old vehicle, we’re able to get a 30% discount on the purchase price, a possible savings of over $10,000!

Take a moment to think of some ways you may be able to “delay gratification” and send excess funds into your retirement accounts!  I know you’d like to be in a position more like the left hand column above than the right.


TB

2 comments:

  1. First thing I want to teach kids if I have them one day is the power of compound interest. It's totally mind boggling.

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    Replies
    1. Sure is! Rule of 72 is an excellent concept to teach.

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