The Power of Time In Investing and How An Early Start Will Make You Rich

This lesson will be a pretty short one, because while it's extremely powerful, the concept of compound interest is actually really simple. In order to help you understand just how powerful it is, we'll run through a scenario of 2 investors: one who starts early, and one who doesn't. However, before we get there, there are 2 super important things you need to understand:

1. What exactly is compound interest?

   
   

   Compound interest is when you earn interest on your interest. That means not only does your money grow, but the growth itself starts to grow too! For example, that means if you invested $1,000 with a 10% return annually, you wouldn't just make $100 every year, you'd make more! You'd make $100 the first year (10% of 1,000), but the second year you'd make $110 (10% of 1,100). This repeats itself over and over again and your money increases exponentially!

1. The Rule of 72

   
   

   If you've never heard of the Rule of 72, it's simply a quick and easy way to estimate how long it’ll take your money to double with compound interest.

   
   

   The formula is simple: 72 ÷ (interest rate) = approximately how many years it takes to double.

   
   

   Let's say you're investments return 10% each year. That means it would take about 7.2 years for your investments to double.

   
   

   Important Note: The rule of 72 isn't always accurate! It works best for interest rates between 6 and 10%, and once you approach bigger numbers, it becomes less accurate. Observe the difference below!

Annual Interest Rate	Rule of 72 Estimate	Actual # of Years
1%	72.00	69.66
2%	36.00	35.00
3%	24.00	23.45
4%	18.00	17.67
5%	14.40	14.21
10%	7.20	7.27
20%	3.60	3.80
30%	2.40	2.64
50%	1.44	1.71
75%	0.96	1.24
100%	0.72	1.00

So How Much Will Starting Early Make Me?

A good question. As I mentioned earlier, the best way to understand how important it is to start early is to visualize it. In this scenario, let's observe 2 investors. One of them read Kidconomy and was inspired to open a brokerage account at age 15, and the other didn't, and didn't open one until they're 25.

In this scenario, we'll assume 2 things:

1. Fixed Interest Rate: 10% per year (compounded annually)

2. No extra contributions: just the $1,000 growing

Age	Kidconomy Investor	Late Bloomer
15	$1,000	—
20	$1,611	—
25	$2,593	$1,000
30	$4,177	$1,611
35	$6,727	$2,593
40	$10,837	$4,177
45	$17,449	$6,727
50	$28,102	$10,837
55	$45,259	$17,449
60	$72,890	$28,102
65	$117,391	$45,259
70	$188,423	$72,890
75	$302,775	$117,391
80	$486,852	$188,423

That's almost a $300,000 difference!!!

Final Thoughts

This all goes to show one thing: time is money. You hear it all the time, and that's for a reason. What may seem like a measly 10 years could actually be a $300,000 difference. If you take nothing else from any Kidconomy post you read, at least take advantage of the time you have and start your investment journey today.

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Have any questions about where to get started? Leave them in the comment section below! If you're ready to take matters into your own hands, check our our previous posts about the best youth investment accounts to start your journey today!