In my previous post, I mentioned how the time duration of your investment and regular contributions are the two main reasons for your investment growth. In this post, I will explain this point with the help of a simple example.
Scenario 1
Let’s assume person A invests $1000 at age 20 and contributes $100 a month until she is 60. When we do the math, she will have over $763,000 at age 60, assuming the annual return is 11% and annual compounding. On average, the stock market gives you a 10-11% return over a long period.
I calculated the numbers using this excellent investment growth calculator here. You can see how your investment will change by playing with different number combinations. It is fun, try it.
In the chart below, you can see her total contributions (in green) are less than $60K, while her future value of the investment has grown to over $760K. Her investment grew by a whopping 12.7 times!!! Isn’t this just awesome?
Scenario 2: Changing the time duration of Scenario 1
Now, let’s assume she starts investing at age 40, and not at 20 but still contributes $100 monthly with the same 11% return. At 60, she will only have around $85,000 and her total contributions would be around $24000. So her total investment grew by 3.5 times compared to 12.7 times in the first scenario. You see the difference!
Scenario 3: Changing the monthly contribution amount of Scenario 1
If I change her monthly contribution to $200 (leaving everything else the same as in scenario 1), the total investment will grow to $1.4 million after 40 years. Isn’t this even more awesome?
Scenario 4: Changing the initial investment amount and reducing the time of Scenario 1
But what if she starts with a bigger initial investment of $50,000? In 20 years, with monthly contributions of $100, the money will grow to $480 K, which is still less than $760 K above.
This simple example teaches a fundamental concept in investing. Time and regular contribution are the two most important factors in making your investment grow!
In all the charts above, you will notice a steep increase towards the latter years.
Just keep in mind that these numbers are in nominal dollars, not adjusted for inflation. Since money loses its value over time due to inflation. Your real return is always less than the nominal return, by the inflation rate. On average after adjusting for inflation, the return in the stock market has been close to 7-8%.
So guys, hopefully, this post convinced you enough, so you can start investing for your future without further delay. Small contributions done regularly and starting early can make your investment grow to an astounding number.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice individually.
