Table below illustrate future value of an initial investment of $1,000 invested for time horizon of 5 , 10 , 15 , 20 , 25 and 30 years with interest rate compounded annually at 10% and 20% respectively , showing a significant increase in value towards the end of investment period.
An investor who invest earlier during young age will enjoy the benefits from compounded grow over time, which reduces the initial investment amount required and risk involved on achieving investment goal.
Let’s compare 3 investors at age of 25, 35 and 45 with equal investment goal, which is to achieve $2,000,000 at age of 55. Age-25 investor has 30 years to achieve his target, while age-35 and age-45 investor has 20 years and 10 years respectively.
We will determine initial investment and required rate of return (interest rate) for each investor.
Let’s assume the scenario where all 3 investors enjoy compounded grow of 10% annually while varies initial investment contribution to achieve investment goal. The initial investment contribution will take either the form of one lump sum investment or through equal monthly contribution until age of 55.
Table below illustrate the scenario.
We will determine initial investment and required rate of return (interest rate) for each investor.
Let’s assume the scenario where all 3 investors enjoy compounded grow of 10% annually while varies initial investment contribution to achieve investment goal. The initial investment contribution will take either the form of one lump sum investment or through equal monthly contribution until age of 55.
Table below illustrate the scenario.
Illustration above shown that age-45 investor who begin to invest 20 years later will required 7 times higher initial lump sum of investment contribution or 11 times higher monthly investment contribution as compare to age–25 investor to achieve same investment goal by age 55.
With lower initial investment, age-25 investor can enjoy better life style through higher spending power or reserve the cash for any investment opportunity arises in the future.
Spending Power = Income - Saving
At same level of income and lower saving , all else equal , spending power will be higher.
Let’s look at second scenario where all 3 investors either with initial investment of $1,000 monthly contribution until age of 55 or one time lump sum investment of $20,000. Annual compounded grow will be varies to achieve investment goal.
Table below illustrate scenario 2.
With lower initial investment, age-25 investor can enjoy better life style through higher spending power or reserve the cash for any investment opportunity arises in the future.
Spending Power = Income - Saving
At same level of income and lower saving , all else equal , spending power will be higher.
Let’s look at second scenario where all 3 investors either with initial investment of $1,000 monthly contribution until age of 55 or one time lump sum investment of $20,000. Annual compounded grow will be varies to achieve investment goal.
Table below illustrate scenario 2.
Illustration above shown that age-25 investor will able to achieve investment goal with lower required rate of return of 9.42% and 16.59% respectively, either through monthly contribution or one lump sum investment contribution which indicate that age-25 investor will able to reduce risk exposure by selecting lower risk investment vehicle while still able to achieve investment goal by age of 55.
For age-45 investor who only have 10 years investment horizon, the alternative to achieve investment goal by age of 55 is to increase initial investment contribution which might limited by current income, higher monthly contribution which reduces spending power or taking higher risk by targeting higher rate of return.
In summary, mastering financial and investment skills, invest at early age will increase probability of achieving financial goal in the future.
For age-45 investor who only have 10 years investment horizon, the alternative to achieve investment goal by age of 55 is to increase initial investment contribution which might limited by current income, higher monthly contribution which reduces spending power or taking higher risk by targeting higher rate of return.
In summary, mastering financial and investment skills, invest at early age will increase probability of achieving financial goal in the future.
