Time Really Is Money

Time may be the single most important factor to your investing success.
Starting now can save you money and make you money. It may also allow you
to achieve better results than superior investors.

By Rex Moore
January 23, 2003

Einstein once said that compound interest was "the greatest mathematical
discovery of all time." Or maybe Yogi Berra said that. At any rate, Albert
and Yogi got it only half right: Compound interest, along with time, is
one of the most powerful forces in the universe. And you can quote me on
that.

The examples I'm about to give will amaze and delight you, and should give
you motivation to open a Drip or IRA or 401(k), or to continue
contributing if you already have them. If you're a teacher, you should
read this to your class. If you're a parent, you should read it to your
kids.

Time saves you money
Imagine you're a 21-year-old, just starting your first post-college job
(just play along). The human resources director asks if you want to start
contributing to the 401(k) plan. The correct answer? You should jump up
and down, hug him, and scream, "YES! YES!"

In almost no circumstance should you not begin saving and investing in
that situation.

Let's say you're looking to retire in about 40 years, at the age of 61.
You've decided a nest egg of $800,000 will do. By starting now and earning
a modest 8% compound annualized growth rate (CAGR) over that time, you'll
need to contribute $2,859 each year to reach your goal. If you wait 10
years to start saving, however, you'll have to pump $6,539 into your plan
annually, or more than twice as much.

If you're able to achieve a 10% annualized return, roughly what the market
has averaged over the years, you'll need to contribute only $1,643 each
year, but $4,421 if you wait a decade.

Time makes you a better investor
Using the same example, a person starting at the age of 31 and earning 10%
per year can't match the returns of a 21-year-old starter earning 8%. In
fact, the 31-year-old would have to earn better than a 12% CAGR in order
to be able to contribute the same $2,859 and still reach $800,000 by the
age of 61.

Put another way, beginning 10 years earlier in this example is like adding
4% per year to your investing skills, which is huge over the long term.
Starting early can forgive poor investing skills.

Here's an even more powerful illustration. (As if you weren't convinced
already!) Two 51-year-olds are talking at a party about their 401(k)
plans:

EarlyBird Johnson: I've earned a compounded rate of 8% over the past 30
years.
LateComer Larry: What a coincidence, so have I!
EarlyBird: Yes, I started contributing $2,500 a year when I was 21, but
had to stop when I was 30. I've not contributed since, although the money
continued to grow in my account.
LateComer: I, too, contributed $2,500 a year! However, I didn't start
until I was 30. So, now that we're both 51, I've been contributing for 21
years, and you contributed only nine years. How much is in your account?
EarlyBird: Let's see... $169,723. How much is in yours?
LateComer (stunned): Uh.... just $136,142.

The lesson is clear: Never talk to anyone named "EarlyBird" at a party.
Oh, yes... and start investing early.

For, you see, gentle investor, the nine-year penalty is even more severe
than you think. EarlyBird contributed a total of just $22,500 over the
nine years, while LateComer shelled out $62,500 over 21 years -- and still
came up well short.

The lesson became even clearer when the two suddenly sober party animals
sat down with pencil and calculator. How many more years of $2,500
contributions, LateComer wondered, would it take until he surpassed
EarlyBird's total?

Assuming both continued to earn 8% annually, would it take three years?
Five years? Well, no. In fact, after 10 more years -- 31 years after
EarlyBird stopped contributing and LateComer started -- LateComer will
still be behind, $333,034 vs. EarlyBird's $366,415.

Believe it or not, the story is still the same after the 50th year. And
the 75th year:

It's not until the 99th year, 90 years after LateComer started pumping in
$2,500 annually, that he will be able to surpass EarlyBird's total. At
that point, LateComer will have contributed a grand total of $225,000,
compared to EarlyBird's paltry payout of $22,500. And it's all because of
EarlyBird's head start.

The lesson is clear: If you haven't started by now, you might as well
forget about it because you'll never catch up. No, wait... I'm just
kidding!

The lesson is... start investing early. If you're not socking some money
away on a regular basis, start now. Every month you wait to begin will
cost you big money many years down the road.

Fool co-founder Tom Gardner once said, "The best time to start investing
was yesterday. The next best time is today."

That doesn't mean you should rush right out and buy a bunch of penny
stocks, or any stocks you haven't thoroughly researched. But it does mean
you should contribute to your 401(k) if you're not already, and invest
outside your retirement plan if you can. (With the usual caveat that this
is money you won't need for several years... five at least.)

Don't worry about individual stocks; start with an index fund, and move to
individual stocks only when -- if -- you're ready to. You can "drip" into
an index fund just as well as you can drip into Johnson & Johnson (NYSE:
JNJ) or Pepsi (NYSE: PEP).

Remember, time may be the single most important factor to your investing
success. An early start means a below-average investor can earn a bigger
pile of cash than an excellent investor.

Just get started, because time is money.

Rex Moore would gladly appear at your birthday party, but can't find the
time. He owned no companies mentioned in the making of this column. His
holdings can be found on his profile page; the Fool's disclosure policy
sits patiently here.


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