Many people feel that investing should be left only to the very rich. However I feel that it should be practiced by everyone, young and old. The problem is that many people only realized that they should invest only when they get older, thus losing out on the time factor.
In this post i will demonstrate the importance of time factor.
The comparison is done between 3 working adult who have savings of $15,000 each at the age 30 and decides to use this sum of $$ for their retirement, say at age 65.
Guy1 : He invests in a mix of medium to low risk products, giving him an average interest rate of 5%
At the end of 35 years, excluding inflation.
He gets : $15,000 x 1.05^35 = $82740
Guy2: Invest in the same products but at a later age,say 40 when he gets more financial savvy.
A the end of 25 years, excluding inflation.
He gets : $15,000 x 1.05^24 = $50795
Guy3: He does not do anything with him $$ and leaves it in an ordinary savings account with an interest rate of 0.25% per year
At the end of 35 years.
He gets: $15,000 x 1.0025^35= $16369
As you can see the difference between Guy 1 and GUy2, starting earlier by 10 years, gives him an additional 82740-50795= $31956! ( starting early is good!)
and the different between Guy2 and Guy3= 50795-16369 = $34426 ( its never too late to invest!)
A small sum of $$ also goes a long way if you have a very advantage in time factor. Say for example a University student with savings of $2000. If he were to invest it at 5% per year(super conservative estimate) at the end of 45years when he retires. He will get
$2000 x 1.05%45 = $17970 which is really not too bad, considering how little he will get if the money is left in an ordinary savings account.
I shall discuss about investment time risk factor in the next post. The time risk factors applies mostly to fixed deposits and bonds. Where locking in the money at a particular time and interest rates, subject you to the risk of not being able to put that particular sum of money into a new product with a higher interest rate.