How Much Money Does a Baby Need to Invest to Become a Millionaire?
How Much Money Does a Baby Need to Invest to Become a Millionaire?
APRIL 13, 2023 Financial Pilgrimage
Compound interest may be the most powerful personal finance-related topic out there. By combining time and money, a little bit today can be worth a whole lot more tomorrow. Most of us have heard about compound interest, but for me, when I sit down and run through the numbers, the power of compound interest blows my mind. In this post, we are going to look at a few examples that stress the importance of starting early, even really early. For example, what if these compound interest examples were taken to the extreme and we started investing for retirement at birth? Let’s take a look.
Compound Interest Examples from Bill, Susan, and Chris
Before we get into the power of investing as a baby, let’s look at a few more realistic compound interest examples. The three individuals below are all in different stages of life.
Susan is a college professor who invests $5,000 per year in a stock-heavy retirement account for 10 years total between the ages of 25 and 35. In total, she invests $50,000 during this period. After age 35, Susan decides to begin investing in other assets and does not put any additional money into her retirement account.
Bill is a dietician who also invests $5,000 per year in an account similar to Susan’s but does so over a 30 year time period. Unlike Susan, Bill got a late start to investing and didn’t begin until age 35. He invested $150,000 total until the age of 65-years-old.
Chris is a lab technician who gets the best of both worlds by investing his $5,000 over the full 40 year period, beginning at age 25 and stopping at 65. In total, Chris invests $200,000.
Who do you think will end up with the most money? It’s pretty obvious that Chris will consider that he has the best of both worlds. But what about Susan and Bill?
Compound Interest Examples
CHART ASSUMES 7% GROWTH RATE. SOUCE: BUSINESS INSIDER VIA JPMORGAN.COM
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The main takeaway from the chart is Susan ($602,070) ends up with more money than Bill ($540,741) even though she only invests for a period of 10 years while he invests for 30 years. They invest the same amount of money annually yet the difference is Susan starts investing at the age of 25 (and then stops after 10 years) and Bill starts at the age of 35 and invests until retirement. So, Susan’s 10 years of investing beats Bill’s 30 years since she started at 25 and Bill started at 35.
This is an oversimplified example. In a real-life situation, investments would likely change from year-to-year, hopefully increasing over time. The interest rate of 7% would fluctuate annually, especially with a portfolio heavily invested in stocks. However, the point here is to observe the power of compound interest over time.
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