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The Most Important Factor To Successful Investing Is...

Finding an investment with above average returns? Nope.
Investing with a large sum of money? Nope.

Starting Early? Yep!

Starting Early? How can this be the most important factor? The answer is in one simple word: Compounding.

What is compounding? The easiest way to explain compounding is to give you an example of a made-up investment account:

You start investing $50 per month into an account that earns 1% interest every month.
Month one $50.
Month two $50 + $.50(1%)+$50(your monthly contributuion)= $100.50
Month three $100.50 + $1.005(1%) + $50 (contribution)= $151.505
Month four $151.505 + $1.515(1%) + $50= $203.02

*Do you notice what is happening to the money? The interest on your money is gaining interest. Interest on top of interest is compounding.

Month five $203.02 + $2.03(1%) + $50= $255.05
Month six $255.05 + $2.551(1%) + $50= $307.60

What does this have to do with successful investing? Instead of months, let's compound years:

Person 1: Age 20. Starts investing $50 per month in a Roth IRA. The mutual fund in the IRA is averaging 13%. At age 65 "Person 1" will have (drum roll please) $1,500,000. Let me write that out so there is no confusion, One Million Five Hundred Thousand Dollars from $50 per month.

Person 2: Age 30. Starts investing $50 per month in a Roth IRA. The mutual fund in the IRA is averaging 13% (same as Person 1). At age 65 "Person 2" will have $420,000. Not bad, but look at the difference. Ten less years of compounding reduced "Person 2's" assets by $1 million. To catch up to "Person 1" "Person 2" would have to invest $180 per month. Over 3 times the amount of "Person 1."

Please do not get discouraged if you are starting late. You will be much better off starting right now, than waiting until later. If you are young or you have children that have earned income, get started right away. These are your most important investing years.

 

 

 

 

 

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