The earlier you start investing, the more money you can accumulate. Here are two scenarios to help illustrate just how valuable time is to reaching your investment goals. Both scenarios assume a 10% rate of return that is compounded annually.
Scenario 1: At age 30 you start investing $100 per month until you reach the age of 65. At that point you will have about $345,000 in investments. In total you put $42,000 into your investments over 35 years. The other $303,000 is from the growth of your money over time.
Scenario 2: At age 20 you start investing $100 per month until you reach the age of 65. At that point you will have about $916,000 in savings. In total you put $54,000 into investments over 45 years. The other $862,000 is from the growth of your money over time.
An extra 10 years can go a long way to helping you reach your investment goals. In the above examples, it made a $571,000 difference!
Guaranteed investments like GICs and savings bonds are great for short-term investment goals, but to reach longer term goals you need better rates of return. Guaranteed investments usually give you returns of about 2% to 5% at best. But if you’ve got some time before you need to cash in your investments, the best place to put your money is in the markets.
When investing in the markets, remember to think long-term. Sure, the DOW or the TSX may have recently had a bad year or two, but if you average out their returns over the last 25 years or so, they’ve been about 9% to 10%. Returns like that will have your investments growing much faster than those guaranteed investments.
When shopping for an investment, always ask to see the historical returns, since the fund or index was started and for the last five and ten years. While historical returns can’t guarantee future results, they are a pretty good indicator of what to expect. At the very least, the investment you are selecting should have matched or outperformed the DOW or TSX stock indexes.
To illustrate the difference that better returns can make over time, consider the following example:
A one-time $10,000 investment at a 3% rate of return vs. a 9% rate of return. After 25 years: With a 3% return you would have about $26,000. With a 9% return, you would have about $86,000.
You need to know what your investment goals are in order to figure out how to get there. Say you want to retire at age 60 with the same standard of living you enjoy now. How much should you be investing now in order to reach that goal?
There are lots of tools available to help you figure out what you need to do.
For starters, you can use the retirement calculator or investing calculator.
