A recent survey from Charles Schwab suggests that for millennials and Generation X to live comfortably in retirement they will need roughly $2 million. For those that are new to the world of investing, accumulating that much wealth can seem quite intimidating. For many, investing is something that is put off until they have a stable career and a steady income. This is a huge mistake that may be regretted later in life. You may ask, why start investing now when I am so far away from retirement? The simple answer is compound interest. Compounding occurs when the returns on your investments are reinvested to generate additional returns over time. As a result, your investment accounts grow exponentially until they are withdrawn from.
The easiest way to understand the power of compound interest is to provide you with an example. In this example we will use the average annual return of the S&P 500 which is a collection of stocks of the 500 largest companies intended to reflect the overall performance of the stock market. In our example we will look at how much you would have to invest each month in order to reach $2 million by age 65 if you started at different ages.
| Start Age | Amount invested each month | Total value at age 65 |
|---|---|---|
|
18 |
$ 170 |
$ 2,007,799.14 |
|
25 |
$ 330 |
$ 2,004,362.57 |
|
30 |
$ 535 |
$ 2,009,266.00 |
|
35 |
$ 870 |
$ 2,003,668.63 |
|
40 |
$ 1,440 |
$ 2,005,763.65 |
|
45 |
$ 2,440 |
$ 2,007,090.10 |
|
50 |
$ 4,315 |
$ 2,007,429.40 |
|
55 |
$ 8,300 |
$ 2,002,811.04 |
At this 9.8% average annual return you can easily see that the longer you wait to start investing, the more money you will have to put forward each month in order to reach the $2 million milestone. You may be thinking, $535 per month at 30 years old is very manageable, why worry about it now when I can just start then? We can look at this example another way to show you why that may not be the best idea. Let’s look at what your investment would look like if you invested the same $535 each month starting at different ages.
| Start Age | Amount invested each month | Total value at age 65 |
|---|---|---|
|
18 |
$ 535 |
$ 6,318,662.01 |
|
25 |
$ 535 |
$ 3,249,496.90 |
|
30 |
$ 535 |
$ 2,009,266.00 |
|
35 |
$ 535 |
$ 1,232,141.06 |
|
40 |
$ 535 |
$ 745,196.91 |
|
45 |
$ 535 |
$ 440,079.18 |
|
50 |
$ 535 |
$ 248,893.33 |
|
55 |
$ 535 |
$ 129,096.86 |
Wow! $6,318,662.01? No way that can be true! With the power of compound interest this is indeed very possible. However, it’s understandable if you don’t have that much to invest at 18 years old but we encourage you to start with whatever you can afford. It’s fairly simple to get started with a well diversified S&P 500 ETF that can be bought in fractional shares for as little as $5 on Robinhood. This concept of slow and steady growth from a solid foundation is what we stand for at Student Investor Club and we are here to help you every step of the way. And remember, today is your opportunity to build the tomorrow you want.
Stock Market Investing in your early adulthood can be a transformative financial decision. It lays the foundation for long-term wealth accumulation and financial security.