Everyone knows the old saying “the best time to plant a tree is 20 years ago, but the second best time is now.” This same principle applies to investing. I’ve heard too many people say that it’s too late for them to start pursuing FI, or how bummed they are that they didn’t start investing earlier and feel so behind. While it’s easy to get down on yourself, it’s not productive, and these thoughts won’t help you take action now.

No matter when you start, compounding interest will eventually do wonderful, wonderful things for you. And obviously, the earlier you start investing, the sooner and the more pronounced these benefits will be.

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$1M by 50

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I’ll be using some blanket statements, and some round-numbered assumptions below. Let’s say you spend $40k per year, and are a firm believer in the 4% rule. This means you’d need $1M to retire. We will also be assuming that you would like to retire at 50. What the chart below tells us is that starting at 20, earning 7% annual returns, you’d need to invest $820 per month to reach your goal.

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So say you’re starting a couple years after college, at 25. You gotta start putting away about $1,200 per month. You might think to yourself “I’m only halfway to 50, that’s miles away, I’ll just start investing when I’m 30 — it’ll hardly make a difference.” If you waited until 30, you’re required monthly contributions needed per month to reach the same amount by the same age rises just north of 50%! This highlights how crucial it is to get started now, because compounding is so incredibly powerful. This same logic applies to anywhere on the table! It’s a smaller number if you step back 5 years, but the number grows even more if you wait 5 years.

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Total Contributions per Period | |||||||

Starting Age | Monthly Contribution | 20-25 | 25-30 | 30-35 | 30-40 | 40-45 | 45-50 |

20 | $820 | $49K | $49K | $49K | $49K | $49K | $49K |

25 | $1,235 | $74K | $74K | $74K | $74K | $74K | |

30 | $1,920 | $115K | $115K | $115K | $115K | ||

35 | $3,155 | $189K | $189K | $189K | |||

40 | $5,780 | $347K | $347K |

The chart below takes the monthly contributions from above, but instead of showing the contribution amounts, it’s showing the compounding amount by the time you turn 50. So for example, if you start at 20, investing $820 per month, the $49K that you invested from ages 20-25 grow to a staggering $319K! That’s huge. Since the goal is $1M, that means that approximately 1/3rd of the ending value is coming from 1/6th of the contributions.

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Ending Value for in Period Contributions | |||||||

Starting Age | Monthly Contribution | 20-25 | 25-30 | 30-35 | 30-40 | 40-45 | 45-50 |

20 | $820 | $319K | $227K | $162K | $115K | $82K | $59K |

25 | $1,235 | $342K | $244K | $174K | $124K | $88K | |

30 | $1,920 | $379K | $270K | $193K | $137K | ||

35 | $3,155 | $444K | $317K | $226K | |||

40 | $5,780 | $580K | $414K |

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Ending Percent for Each Period | |||||||

Starting Age | Monthly Contribution | 20-25 | 25-30 | 30-35 | 30-40 | 40-45 | 45-50 |

20 | $820 | 33% | 24% | 17% | 12% | 9% | 6% |

25 | $1,235 | 35% | 25% | 18% | 13% | 9% | |

30 | $1,920 | 39% | 28% | 20% | 14% | ||

35 | $3,155 | 45% | 32% | 23% | |||

40 | $5,780 | 58% | 42% |

The above tables might be a little confusing at first, but are extremely powerful at showcasing the jaw dropping power of compound interest. Our time is guaranteed to be finite, and the snowball effect of compound interest takes a while to become noticeable. If financial independence is something you’re considering, now is the time to get started!

If you have any questions on the tables, I’d be happy to answer them! What do you think of this way of viewing both the value of time and compound interest?