Previously I mentioned wanting to talk about the ‘Rule of 72’. This is a financial term that is already in our Glossary page. The short version is that it is a math formula designed to calculate how long it will take an investment to double at a fixed growth rate. Basically:

For example, VOO, the Vanguard S&P 500 Index Fund, has a return rate of 15.22% – 15.59% over the last 10 years. At a 15% rate that would be 72/15 = 4.8 years. The conservative estimate over the last 100 years, after inflation is around 7%. That’s why people always talk about 7%. It’s 10% before accounting for inflation. At 7% your money in the S&P 500 would double every 10 years on average.

That means $100,000 invested in your first 10 years of a 30-year working career would become $400,000, on the conservative side, by retirement. If you saved the same $100,000 each decade that would be $700,000. If you didn’t touch it that’s $1,400,000 10 years later.

This is the power of investing early and often. Time is the one part of investing you can’t make up for. I didn’t start investing until I was 28 years old. That was 10 years ago. If you don’t include my wife’s retirement accounts, mine are at $542,000 today on a very down market day. Using the math above if I added ZERO more dollars I would hit $1,000,000 by 48. $2,000,000 by 58, and $4,000,000 by 68. Which is “normal retirement age”. That’s the conservative 7%. A major part of that total isn’t my contributions but the insane gains of the last decade.

If I had started at 18 with even $200 a month into VOO, I’d have $155,000, or $152,000 in VTI (Vanguard Total US Market Index). I lost 10 years of growth and compounding by not investing early.

Can you do $100 a paycheck, paying yourself first? Future you will thank you.
Next time we’ll tackle the Mr. Money Mustache “Magic Numbers.”

~~Miniwing~~
Parent, Investor, Stoic