Investing Early vs Investing Late: Pay Yourself First!

In the 'wealth formula', point number 2 was 'Time'. In any sort of investment you need time to let your money grow and compound over and over. I've done a quick worksheet comparing 2 scenarios with 2 different people.

Person A starts investing $300/month ($3600/year) starting at age 25 and only invests for 7 years and then stop.

Person B starts investing the same amount, $300/month ($3600/year), but starts investing later in his life, at age 32 (the year after Person A stops contributing).

We will assume they are both investing in a tax-deferred account and are getting 8% return.



As you can see, at age 48, Person B surpasses Person A; however, Person A had only made a total contribution of $25,200. Person B had to contribute for 17 years, with a total investment of $61,200, in order to catch up to Person A. That's a difference of $36,000! The affects of compounding were in favour of Person A because he started early and let his money grow.

But lets think realistically, especially those of us who are married and have kids and other responsibilities (i.e. mortgage, taking care of elder parents etc...). Does it become easier to start saving early or start saving later? I think we can all agree that as time goes on it becomes harder to start saving. That's why it's VERY important for younger people, especially younger couples, to start saving as soon as possible.

As you get older it becomes harder to save because more expenses start to come up; for example maybe you just bought a new house and have a mortgage to pay, or your kids are now growing up and college/university expenses are coming up, or you need to start caring for elder parents. Whatever the case may be, something always seems to come up that makes us say "okay, I'll start investing next year". The key is to start investing early and build that discipline.

The above example is just for illustration purposes, so I'm not saying that you should only invest for 7 years and then stop, not at all! Investing should be done over the long term so you can take advantage of market cycles and compounding.

Procrastination is one of the main causes of failure, when it comes to accumulating wealth.

Now comes the point of some people who will say "I don't have $300/month to invest". What if we make some small changes in our life and spending habits that will help you get that $300/month -- $10/day? There's always things you can cut down, such as:

- Sodas
- Cigarettes
- Lattes
- Cable TV
- Games
- Sweets
- New Gadgets
- Shopping
- Driving a Big car
- Eating from outside
- Partying
etc...

You don't have to cut out every single one, but cutting back on a few of these things can be the difference between you retiring successfully, or un-successfully! You MUST have discipline and consistency if you want to win the 'wealth game'!

Now, of course, the numbers given above are for illustration purposes only. Whether someone has $300 a month or $100 a month to contribute, or whether a person is getting 8% or 5% as a rate of return, is not really the point. The main point is that, if we want to have a chance of achieving our financial and retirement goals, we need to start as early as possible and be disciplined as well.

From experience, I have seen that those who start at a younger age are more inclined to keep saving and also will increase their contributions over time. Once the habit of savings is developed, and you see the dollars accumulating in your savings plan, it becomes easier and more fruitful to see your hard earned money at work for you!