Making Time Work For You With Investments
Today I am going to give you some handy tips to help you think through investments and financial planning in a simple and basic way.
Now that we have touched on Compound Interest and the EFFECTS of Inflation in the last two articles, we can move on to a practical example of how the two work hand in hand with each other and with spending time in the market and not trying to time the market.
The example below illustrates not only the importance of compound interest and inflation, but also how to use TIME to your advantage when it comes to investing. I really wish that they taught this to us this in school…
Let’s take a basic example and say we have John and Max.
John and Max are wanting to invest some money into exactly the same investment that gives a return of 10% and also has an annual increase of 10% on the investment, so that they can keep their investment amount above inflation.
John starts to save immediately and puts away R500pm over 20 years. At the end of the 20 years he would have invested R120 000 of his hard earned money and that will have a buying power of what R30 000 has today (if inflation was at 7% over those 20 years). Another way you can look at it is that if John didn’t invest the funds and kept it in his bank account (if he had the discipline not to spend it) he would have lost 75% of his buying power. Luckily John was smart enough to invest the money and after the effect of compound interest and the reinvestment of all of his dividends the R120 000 that he has invested has grown to R470 000 and that would have a buying power of R120 000 in today’s terms. So you can see with this example John has been smart by starting early and allowing compound interest do all the work for him in keeping up with inflation.
On the other hand Max decides to only start investing 10 years after John has started, so instead of investing for 20 years, he will invest for 10 years. What do you think Max has to invest every month to get to the same the R470 000 that John has got to? Would your guess be that he would have to invest R1000pm, because his investment is half the amount of time as John and needs to play catch up? Well if it was, guess again.
The answer is quite scary… For Max to get to an investment return of R470 000, he would have to start investing R2050pm for 10 years. In the end Max has paid R246 00 for the very same thing that John has paid R120 000, more than double the price. This is not a very pretty picture that Max has created, by taking his time to start investing and not taking advantage of compound interest.
So who’s example will you follow above?
Remember that starting to save today will always beat starting to save tomorrow… get disciplined and make your money work for you instead of you working for your money.
(Images from Pinterest)
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All Video Clips supplied by Allan Gray
August 3, 2014
Grant van Zyl