A Quiet Fortune column: Young people and the power of time
A Quiet Fortune
Robert, Mark, Jane and Tommy are cousins. At a family reunion they get to talking about investing and all agree that they will start putting some money away for the future.
They know they will most likely work until they are around 65, and that looks like forever away. In fact, it’s sort of laughable for them to even imagine being that old. To quote one cousin, “I’d rather be dead than 60!”
But they are smart: They know Social Security is threatened even now and that, although they hope to have some kind of decent retirement plan available to them, it may not be enough. The four cousins have seen their parents worry about money, and they want to avoid going through the same stress. So they all decide to learn some things and start investing.
For comparison’s sake, the facts in this story are the same for each:
• each will invest $100 per month, and
• their fund(s) will earn an average of 8 percent each year.
Only one thing is different: their ages. Robert is 25, Mark’s 35, Jane’s 45, and Tommy (whose brother Robert has “conned” him into investing) is 15 years old.
How much will each of the cousins have by the time they reach 65?
Cousin / Years to invest / Total invested / Total by age 65 / Will have made a profit of
Jane 20 $24,000 $58,907 $34,907
Mark 30 $36,000 $149,047 $113,047
Robert 40 $48,000 $349,125 $301,125
Tommy 50 $60,000 $793,227 $733,227
Look at those numbers, especially Tommy’s. Here are his facts:
• Tommy starts very young.
• He has summer jobs, an allowance, and some birthday money.
• He somehow collects $100 each month to stash away, even in college.
• All the time he works, marries, has a family, and goes through life he keeps that monthly investment going automatically.
• I imagine he’ll decide to add more to his investments as time goes on, but in this story he stays with $100.
As they save for the future Tommy and his wife will learn to trust themselves as to what their family needs right away and what might have to be put on the list to get later. But they’ll always make sure that they pay themselves first by moving some money into their Forever Fortune account each month. And guess what? Tommy will retire with more money than plenty of people in his town who had earned much more during their careers.
Over the years Tommy will have invested $60,000 and ends up with $793,227. His profit, $733,000, is almost $700,000 more than his cousin Jane’s, and it will cost him only $36,000 more than she will have invested.
The “magic,” of course, is that Tommy learned about how money can compound from his brother and cousins. They will do OK, but because he started investing when he was younger, Tommy will have almost three-quarters of a million more than his oldest cousin Jane has by retirement time, and more than double what his brother Robert (who is only 10 years older) makes.
Tommy’s Little Sister
To really make a point, let’s take this somewhat improbable tale one step further. Let’s imagine that Tommy’s little sister, who is 10, also starts an investment account. She does the same thing the four cousins have done. Of course because she’s so young she can’t save $100 each month for quite a few years. But she has set that goal and does save some of her birthday and all of her babysitting money. Later on she contributes more every month until she catches up to her target. It’s hard at first but becomes easily manageable as she gets older.
Here’s what Tommy’s younger sister will have years from now: $1,189,133. She will have invested a mere $6,000 more than Tommy, who is 5 years older, but…
… that extra 5 years will bring her almost $400,000 more.
Even with inflation factored in, this will provide a significant boost to her future. Although Tommy’s sister may not ever work at a really high-paying job, she’ll be comfortable, secure, and able to live without money worries.
The point of this story: Compound growth’s miracle actually happens at the end of a long period of time; a few extra years can make an enormous difference. Start as soon as you can. And if you know any young people, please tell them how valuable time is.
Terrie Drake is the author of the book “A Quiet Fortune” and a retired teacher and librarian. She and her husband have lived in Glenwood Springs since 1974. She is not a financial adviser; consult a competent professional for your personal financial solutions. She can be reached at firstname.lastname@example.org.