The One Thing You Need To Understand About Investing

cow piggy bank

I used to be terrible with money.

I mean really terrible. Not long after Mick and I first met, he came across one of my credit card bills and almost had a conniption! And I'm not exaggerating in the slightest. You see, I was only ever paying the minimum amount and using one card to pay the other. And on top of that, I was using store cards where the interest rates were diabolical! So I was never getting on top of my debt and I was kindly giving the finance companies some extra money each month. Mick put a stop to all of that quick smart.

He's the money guru in the relationship and the reason why we get to chase the snow. I've come a long way since then and learnt a lot but there is one lesson that really sticks out in my mind. It's about investing and compound interest. And if you're already thinking that you don't have enough extra cash to set aside - I'm going to stop you right there because it's even more important that you read on.

The story of Arthur & Ben

This is a summary taken from financial coach Dave Ramsey. It's one of the best examples I have ever seen to explain the value of compound interest.

Arthur and Ben are childhood buddies. At the age of 19, Ben decides to start investing $2,000 a year. He stops after 8 years, at the age of 26, and has invested a total of $16,000.

Arthur is a little late to the game and starts at the age of 27. He invests $2,000 each year until the age of 65. His total investment is $78,000 over 39 years.

Both have invested in similar accounts which have given them an average of 12% return. Now at first glance, it might seem obvious that Arthur who invested $78,000 would have more than Ben who invested $16,000 right? Wrong. Here's what each year looks like.

Ben came out with $700,000 more than Arthur. His $16,000 turned into almost $2.3 million! Now don't get me wrong, Arthur still did well and almost doubled his investment. It's still a good result but I'd much rather be in Ben's shoes. It's also important to note that a 12% return is pretty high. It's normally an amount that you might see from a good share investment portfolio, but I decided to keep this example the same as the original as I found it quite powerful. Generally, a high interest savings account would see around a 5% return. Let's see what that looks like.

compound interest 5%

As you can see, in this example Arthur actually ends up with over $100k more but the return on investment is A LOT lower. Ben has grown his $16k investment by 840% whereas Arthur has grown his $78k investment by 307%.

The lesson: starting early is better but starting late is better than not starting at all. 

Investing is a massive part of why we are able to do the things we do and it can be in many forms. The thing is, you can't just live from pay to pay and hope to get ahead. You have to do more. You have to look ahead to the future. And you have to take control.

I love this example, it really brought it home for me. I hope that you like it too and it has given you something to think about. Let me know what you think or what you do to get ahead in the comments below and share it with someone who could benefit. I'd love to hear from you!

Jen

Read more on how we saved to travel.

Save this for later on Pinterest!

 
 

You may also like