Matt Franz : Zealous For Knowledge

Start Early

It’s not hard to get rich in the stock market. It’s hard to get rich quickly in the stock market.

To be more precise, it’s hard to get rich faster than average. When you’re impatient you’re more likely to accept more risk than you ought. Anything times zero is zero, and a permanent loss can wipe out all prior compounding.

The compound interest formula has two variables: R (Return) and N (Time). The formula is:

Return gets most of the attention. But for most people time does the heavy lifting. Time, after all, is guaranteed to pass. Above-average returns are never guaranteed.

This got me thinking about a hypothetical situation. Let’s say there are two 22 year-old investors fresh out of college and they both have a Roth IRA. Investor #1 makes the maximum contribution to her IRA ($5,500) on December 31st each year until she’s 30. Then she stops, forever. Investor #2 doesn’t make his first contribution until he’s 30, but then contributes the max each year until he’s 65.

Investor #1 contributed $44,000 total between the ages of 22 and 29. Investor #2 contributed $198,000 total between the ages of 30 and 65. I assume each indexed and earned 10% annually.

Who ended up with more?

As you can see investor #2 just can’t catch investor #1. This shows how powerful time is. You can retire with more money for 1/4th the cost if you start early.

Remember the Chinese proverb:

The best time to plant a tree is twenty years ago. The second best time is now.

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