If I was a high schooler...
The law of compounding
I am close to 50 now and am an executive of a US public company. I was born and raised in a third world country, and, by God's grace, I had the opportunity to migrate to the US twenty years ago and start my life in this country. Certainly now, I can look back and wish to live my life differently, especially in the financial world. So, I simply wish to share my thoughts for the younger generation for them to benefit.
I have learned about the law of compounding since high school. However, I failed to appreciate the significance of this law. While I started saving early, even during my primary school time, I was only exposed to investing in the bank and relied on bank interests for my investment returns.
Just as a background, the law of compounding means earning interest not only on your original principal but also on the interest that your investment generates.
Compound interest is sometimes described as “interest on interest” because earned interest essentially gets added to the principal over time.
With this, one would appreciate that the earlier you started, the more headway you have in terms of your investment. Let's take a specific example here:
Investor A
Starts at age 15
Invests $5,000 every year for 10 consecutive years and then stops contributing.
Investor B
Starts at age 25
Invests $5,000 every year for 30 consecutive years until retirement.
Let's assume an 8% interest rate annually with a retirement age of 55.
At age 55
$787,180
Approximate value for the person who began investing at age 15.
$611,730
Approximate value for the person who waited until age 25.
Now, we can see that a high schooler who invested with $5,000 for 10 consecutive years beats a college graduate who invested with a much longer period of 30 consecutive years.
The moral of the story
Invest early.
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
— Often attributed to Albert Einstein