Investment Models: From $100 to $1M+ and Everything in Between (Why What & When You Invest Matter)
Welcome back for Part 4 of our 5-Part Mini-Masterclass on Investing!
In Part 1 you learned about an A-Z 9-step roadmap to investing, in Part 2 you heard 5 little-known mistakes most new investors make and what to do instead, and in Part 3 you learned about 5 different asset classes and questions to ask yourself to help figure out which could be best for you to begin investing in.
Today I am excited to show you that you don’t have to have tens of thousands of dollars to invest every month to see change in your life. Specifically, we will walk through 5 examples of different initial investments, monthly investments, and age at the time of first investment so you can see how compound interest could potentially help your money grow in various scenarios.
First, because we are solely looking at the amount of money you put into the market and how often, we need to make sure all other variables remain the same. So for all examples that follow, let’s say the stock market returns at 10% across the board (which is its historic average*, but it’s highly unlikely to return at exactly 10% every year consistently).
But, since we are trying to isolate the variable of what’s within YOUR control - which is how much money you put in, how often, and at what age - let’s say every year you’re getting 10% for the sole purpose of these examples.
EXAMPLE 1: YOU INVEST $100 ONCE
So, in our first example, let’s say you invest $100. At 10% annual interest, after 1 year, you’d have $110, meaning you gained $10. Let’s say you don’t invest anything else and you leave this money alone for another year. After 2 years, all things the same, you’d have $121. That means, in Year 2, you gained $11.
Notice how even though everything else remained the same, you gained $11 in Year 2, which was LARGER than the $10 gain in Year 1. That’s because of compound interest.
Here’s how it works: In Year 1, you gained 10% on your original deposit of $100, which came to a $10 gain. In Year 2, you gained 10% on your original deposit of $100, which we just discussed is $10, but you ALSO gained 10% on the GAIN from Year 1. How much did you gain in Year 1? $10. What’s 10% of $10? $1. So, in Year 2, you get the $10 + the $1 which is how you wound up with an $11 gain in Year 2.
As you can see, interest is a PERCENT so, the larger the base, the larger the return. You’ll notice how this starts to add up over time and how, each year, if all other variables remain the same, the growth gets larger and larger in the same amount of time.
So let’s continue with the example. In Year 1, you’d gain $10. In Year 2, you’d gain $11. In Year 3, you’d gain over $12. Fast forward to Year 10 and you’d gain nearly $26 that year. In Year 20 you’d gain over $69. In Year 30, you’re closing in on $200 of gains. By Year 40, you’re upwards of $500 in gains. And by Year 50, you’re at over $1,300 worth of gains.
And, remember, those are just the annual gains we were talking about, I was just illustrating how the GAIN itself increases over time… your investment portfolio after all those years of gains on gains is now worth over $14,500. So, in this example, with all other variables remaining the same each year, you invested $100 one time at a 10% annual return and it became $14,537.
See how cool compound interest is?
EXAMPLE 2: YOU INVEST $1K ONCE
Let’s take this same example, except we are going to change one and only one thing: the amount you put in at the beginning. So, in this example, instead of putting in $100, you put in $1,000. Let’s see what happens.
Instead of gaining $10 in Year 1, you’d gain $100. Instead of gaining $11 in Year 2, you’d gain $110. Instead of $12 in Year 3, it’s $121. Fast forward to Year 10 and instead of $26, you gain $257. In Year 20, instead of $69, you see $695. In Year 30, it’s $1,880 instead of $188. Year 40 is $5,090 instead of $509. And in Year 50 instead of the $1,377, you gain $13,779 that year.
And, more importantly, instead of having a portfolio that’s worth $14,537, you’re looking at $145,370.
At the end of the first example, you were gaining about $1,400 per year and had a portfolio worth $14,500. At the end of the second example, in a year you gained almost as much as the entirety of your portfolio in the first example… so your ultimate Example 1 portfolio was worth about $14,500, and in Example 2 the GAIN you saw that last year was $13,779 and your ultimate portfolio was worth over $145k.
And the ONLY difference was how much money you put in at the beginning… which is a beautiful thing because that’s something that’s entirely within your control.
Now, disclaimer, like I said this is for illustrative purposes only - none of us know what the market is going to do and whether it will perform at, above, or below average each year. But I hope you can see what I’m trying to illustrate here.
EXAMPLE 3: YOU INVEST $1K UPFRONT, THEN $500 PER MONTH
Now, let’s build on that last example. Like I said, the bigger the base, the bigger the percentage-based return, right? But not all of us can afford to put in a bunch of money upfront, so this is where consistent investing comes into play.
When I say ‘consistent investing’ I mean contributing to investments regularly. So let’s look at an example of this. Let’s see what could happen if you invested $1k upfront and then invested $500 per month thereafter. Again, all other variables remain the same in this example.
Instead of gaining $100 in Year 1, you’d gain $440. Instead of gaining $110 in Year 2, you’d gain $1k. Instead of $121 in Year 3, it’s $2k. Fast forward to Year 10 and instead of $257, you gain $10k. In Year 20, instead of $695, you see $37k. In Year 30, it’s $110k instead of $1,880. Year 40 is $307k instead of $5,090. And in Year 50 instead of the $13,779, you gain $841k that year.
And, more importantly, instead of having a portfolio from Example 2 that’s worth $145k, you’re looking at $8.8M.
Now, remember, the only thing you changed from Example 2 to Example 3 is that instead of investing $1k once and doing nothing else, you invested $1k upfront, and then kept investing $500 per month thereafter.
EXAMPLE 4: YOU INVEST $1K UPFRONT, THEN $1K PER MONTH
What could happen if you decided to increase your monthly investment?
Let’s look at what could happen if you invested $1k upfront and invested $1k per month thereafter. Again, all other variables remain the same in this example.
Instead of gaining $440 in Year 1, you’d gain $775. Instead of gaining $1k in Year 2, you’d gain $2k. Instead of $2k in Year 3, it’s $3.5k. Fast forward to Year 10 and instead of $10k, you gain $19k. In Year 20, instead of $37k, you see $73k. In Year 30, it’s $217k instead of $110k. Year 40 is $609k instead of $307k. And in Year 50 instead of the $841k, you gain $1.7M that year.
And, more importantly, instead of having a portfolio from Example 3 that’s worth $8.8M, you’re looking at $17.6M.
Now, remember, the only thing you changed from Example 3 to Example 4 is you decided to increase your monthly contribution to your investments… and you can see what a world of difference it made.
EXAMPLE 5: YOU INVEST 10 YEARS THEN STOP VS. YOU WAIT 10 YEARS THEN START
In the last example, I’d like to look at something different… but it’s still something that’s within your control which is important when it comes to investing because there are many things outside our control.
So, for Example 5, instead of how much money you put into investments, I’d like to look at WHEN you START and STOP contributing to your investments and how that could affect things.
The reason this initially interested me is due to something my college finance professor said to us on the last day of school that went something like this… he said, “If you invest starting now at age 20 and invest until age 30 and then quit contributing entirely, you’ll likely end up with more money than if you wait to start investing until you’re 30, then continue contributing to your investments for the rest of your life.”
This stuck with me but I’d never run the numbers on it until recently… so let’s see if he was right.
In this example, we’re using that same 10% return we’ve been using all along with all other variables remaining the same except the start and stop date.
Let’s start with the version of you who waited until you were 30 to start investing. Let’s say you put in an initial investment of $1k, then an additional $1k per month for 50 years until you turned 80, then stopped. By age 40 your investment portfolio has grown to $209k. By age 50 you’re looking at $773k. At 60, you have $2.3M. At 70, it has grown to $6.4M. And at 80, when you stop, you would have contributed a total of $600k of your own money and your portfolio would be worth $17.6M… Not too shabby, right?
Now let’s see what would have happened if you started investing at age 20 with an initial investment of $1k and deposited an additional $1k per month for 10 years until you turned 30, and then you never contributed to your investments again. By age 30, instead of $1k, your investment portfolio would have grown to $209k. At 40, instead of a portfolio worth $209k, your portfolio would be worth $566k. By 50 you’re looking at $1.5M instead of $773k. At 60, you have $4.2M instead of $2.3M. At 70, instead of $6.4M, you have $11.2M. And at 80, instead of a portfolio worth $17.6M… you’d have a total of $30.4M - almost DOUBLE the previous scenario.
But here’s the coolest part.
Not only do you end up with nearly DOUBLE the money in the end, but instead of contributing $660k of your own money, in total, all you would have contributed from age 20-30 before STOPPING your contributions entirely, would be $120k. All other variables remaining the same, by waiting you pay over 5x more for about half the results.
THE BIG PICTURE
If you didn’t start investing the second you graduated college, then you’re like most of us… you are NOT ALONE! This is not meant to discourage you but ENCOURAGE you to move forward in learning about investing, figuring out what makes sense for you in your life, and whether some kind of strategy to take advantage of potential gains from compound interest is something you’d like to do with your money.
I hope these examples helped you understand how initial investment, regular contributions, and age of beginning can play into the amount of compound interest your investments may be able to generate.
As a reminder, I’m not a financial advisor and I do not know what the market is going to do (to be frank, neither do they) and all investing has risk. Having a strategy to reduce risk whether that’s an Emergency Fund, diversified investments, and/or a specific strategy tailored to your unique needs and risk tolerance is something to explore.
I always suggest doing your own research and, if you’d like to run your own numbers, there are plenty of compound interest calculators online that you can find with a quick search - that’s how I got the numbers for these examples. Don’t be afraid to explore and learn!
NEXT STEPS
If you’re feeling inspired to get serious about investing, I have resources that can help you make sure your foundation is in order before you jump in.
My budget calculator guides provide a nice place for you to compare your income and your expenses to see what’s left over (which is what you might be able to afford to invest). Grab my free version to get a general sense, and if you want to get serious about seeing what you might be able to afford to invest month after month, then check out my low-cost repeatable online version. That one comes with a mini-training to ensure you get set up successfully!
If you’re rearing to go, I also have a New Investor’s Checklist with 14 action items that will help you go from “I’m ready to invest but unsure what to do to get set up,” to “I’m officially invested!”
Again, please don’t be discouraged if you haven’t started investing yet! We cannot change the past, but we can decide what we’re going to do moving forward and stick with it.
There’s a beautiful quote that applies here so I’ll leave you with that: “The best time to plant a tree was 20 years ago… the second best time is now.”
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