“You know what they say,” Pete said. “You’ve got to play the full 60 minutes if you want to win.”
Steve began, “Let’s get started. Did everyone write some game plans for their highest priority goals?”
Pete replied, “ We haven’t had time yet, Steve, but we’re going to do it this week.”
Steve continued, “It’s okay to delay things a little, but I’m going to show you tonight that the earlier you get started on your financial goals, the better. Chris, you’re in an ideal position to start saving. You’re 18 and you have your whole life ahead of you. If you were to start investing a dollar a day on investments that return 10 percent per year, how long do you think it would be before you’re a millionaire?”
Chris guessed, “It would probably be...100 years?”
Steve replied, “It’s good that you’re guessing a nice round number, and that’s correct if your investments are only returning 5 percent. At 10 percent, though, you would actually have a million dollars by the time you’re 74.”
Mark chipped in, “That’s all well and good, but getting 10 percent on your investments isn’t guaranteed. Most of the banks are suggesting 6-8 percent as a reasonable rate of return when planning your future.”
“Thanks for pointing that out,” Steve responded. “The banks like to show conservative rates of interest. Another example that the banks like to show is two people who decide at different points in their life to start saving money. Let’s use Chris, and we’ll pretend he has a twin brother John.
If Chris starts putting $2,000 a year into investments returning 8 percent (we’ll use the bank’s figures) at age 21, and then stops at age thirty--” (he bent over his laptop) “--he’ll have over $145,000 by the time he’s fifty. If John, his twin brother, waits to start investing his $2,000 a year until he’s thirty-one, and then continues until he’s fifty, he’ll have just under $99,000.”
Mark said, “Wait a minute. John has put in $40,000 and Chris has only put in $20,000. Don’t you mean John has $46,000 more?”
Steve replied, “No, Mark. This is the magic of compound interest! By getting the money in earlier, you don’t need to put as much in to get more out. Time allows the interest to accumulate. Compounding means that not only is the $20,000 making interest, but the interest is making interest as well.
“The first advantage of getting started early, then, is that your money will work for you through compound interest. That’s the magic which allows a dollar a day to grow into a million dollars within your lifetime.”
Chris looked puzzled. “Anybody can save a dollar a day. Why aren’t all retirees millionaires?”
Steve responded, “That’s an excellent question! Why don’t we ask your father? Mark, why aren’t you going to be a millionaire when you retire?”
Mark grumbled, “When I was young, the last thing I thought about was retiring. Any money I made went towards getting married, then supporting my family and then preparing for your college education. I’m doing well now, though, and I’m learning more about investing, so I can increase my rates of return.”
“And I think that’s typical of a lot of North Americans,” Steve remarked. “It’s hard to plan for the future when you’re trying to struggle through the day-to-day expenses. This brings us to the next advantage of getting started early, which is that your habit of saving for the future gets ingrained at an earlier age. We are all creatures of habit. If we are in the habit of living day to day, and trying to get by each month, then we’ll tend to stay in that habit until something stronger pulls us out of it. If you can get started early with the habit of saving and investing your money, then that habit will pay off huge dividends in the future.
“The third major advantage of getting started early is that your knowledge of investments will have time to grow and mature. We’ve already spoken about different rates of return. To get higher rates of return often involves changing your investment strategy, and thereby taking more risk. The earlier you’re involved with investing, the longer your timeframe for learning how to get higher rates of return.”
James Allan is a writer and speaker who serves his clients with the information they need to live out their dreams. For more information, visit his website www.streethockeymillionaire.com.