Investment advice: Start Saving Now, Not Later: Time is Money

“The amount of capital you start with is not nearly as important as getting started early.. Every year you put off investing make your ultimate retirement goals more difficult to achieve.”

Having laid out some groundwork in his 3 “basic points”, Malkiel goes on to his 10 “rules” for financial success. Some of them are straightforward. But even here is provides his insight and help on getting it done.

The first rule then: Start Saving Now, Not Later: Time is Money.  The secret of getting rich is the miracle of compound interest, slowly but surely (something we likely don’t want to hear). Albert Einstein once described compound interest as the “greatest mathematical discovery of all time.”

Malkiel illustrate this miracle three ways.

1) “The rule of 72”. Divide the number 72 by the rate of return on an investment you can earn over the long-haul. The result will be the number of years to double your investment. For example, if you can earn an average of 7.2% per year, it will take you 10 years to double your money (72/7.2). So if you start investing at age 25 rather than 55, you will have 8 times as much when you are done (2x2x2).

2)  Malkiel’s book includes a link to a graph by Jeremy Siegel in his book: Investing for the Long Run.  The graphs shows the long-term performance (over 200 years) of a number of investment choices including gold, treasury bills, bonds, and stocks compared with the growth of the consumer price index over the period 1802 to 2002. To see an inflation adjusted version, go to this link to the page of his book on Google Books. It shows compounding pays you when it is on your side.

Long-term growth in investment types
Long-term growth in investment types

3) Finally, there is a case study, “the million dollar difference”.  Pay close attention. Which would you chose:

  • One brother saved $ 2,000/year for 20 years, starting at age 20, and then he saved no more (total saved = $40,000). He earned 10% tax free on what he saved.
  • The second brother did not start saving until he was 40. He saved $ 2,000/ year from age 40 to age 65. He also earned 10% tax free (total saved = $50,000).
  • How much did they end up with?
    • The first brother earned $1.25 million on his $40,000 invested.
    • The second brother earned: $200,000  on his $50,000 invested.
  • The difference: time. The moral: get started early.

The moral is clear, you can accumulate more money just by starting now.

To get rich, you will have to do it slowly, and you have to start now.

Next time: Rule Two: Keep a steady course: the only sure road to wealth is regular savings.

The above is from my on-going study on investing, from Malkiel’s  The Random Walk Guide on Investing. For more, see the index page to my full summary.