The Snowball Effect


As a snowball rolls down a snow-covered hill, the ball will pick up more snow, increase in size, gaining more mass exponentially. It is a good analogy for the effects of compound interest. The earlier you start investing, the easier it is for your money to multiply and grow. Albert Einstein famously said that 'Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn't, pays it.' Just how powerful is compound interest? Assuming your goal is to reach a $1 million portfolio by the age of 55, the amount of money you will need to invest monthly varies by a huge difference depending on when you start. 

 

If you start at...

-Age 25: You will need to invest $835 monthly 

-Age 30: You will need to invest $1233 monthly

-Age 35: You will need to invest $1916 monthly 

-Age 40: You will need to invest $3133 monthly 

 

*Calculations are assuming a 7% yearly compound interest 

 

The amount needed per month to achieve the goal changes drastically the older you start investing. Investing $835 per month sounds manageable while $1916 per month is a bit of a stretch. The earlier you start investing, the less money you need, and the easier it is to reach your goal. I honestly believe time is the biggest determinant of getting rich and the amount of money is secondary.  The point I am trying to make is if you have a goal of becoming rich, stop procrastinating, and come up with a financial plan and execute it. 

 

TLDR: Never underestimate the power of compounding interest and time is the biggest factor for your investments 

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