On one occasion I heard the phrase, “the best time to plant a tree was 20 years ago, and the next best time is today.” As for the right time to start building wealth, I could not agree more with the same phrase.
We just need to look at the history to realize that, on the long run, the stock market has been an ideal partner to make the best out of our savings. The magic that makes this performance possible can be summed up in the power of compound interest.
What does compounding means?
Suppose that an investment of $100 grows at a 10% for one year, our balance at the end would be $110. With compound interest, we mean that these $10 of profit, remain invested and so at the end of the second year we would have $121, instead of 120 (if we had taken the profits and left only $100). This effect repeated for 10 or 20 years, assuming the constant 10% growth, would yield balances of $259 and $673, respectively. Putting in perspective, not reinvesting profits during 10 and 20 years would result in $200 and $300. In the 20-year scenario, compound interest managed to double the results of simple interest, and at 30 years the difference would be 4.4 times.
I think we’ve all experienced the joy of finding a forgotten $20 bill in our pants. Although this feeling of joy is usually ephemeral, it is more likely that this bill will be used soon and carelessly.
Analyzing this phenomenon, this missing bill represented a delay in spending and it is unlikely that our lifestyle had been hampered. In other words, you can save. On the other hand, that bill, considering the characteristics of the compound interest, could have been more than just a $20 bill after a sufficient period of time elapsed. If we were not aware of its existence, imagine having seen it after 10 years and instead of a mere $20 bill seeing a well grown $52 worth investment, as we saw in the previous exercise.
Returning to the feeling of joy of finding the $20 bill, the joy does not come from the $20 itself, it comes from what we can do with this money. People do not want more money as an end, people want more experiences, more security, more things, more time with their loved ones and for themselves, more fun, more freedom. Give yourself and yours more freedom today.
If we did not plant a tree 20 years ago, let’s start thinking about the tree that we will have in 20 years if we start planting today.