2 Reasons Why We should Start Investing Early

There are 2 reasons we should invest early. One, the earlier we start investing, the earlier we could enjoy the results. Two, the earlier we start investing, the lesser the amount of money we need to invest for the same investment goal.

These 2 reasons are the result of the compounding effect of investment returns.

Compounding Effect for a Lump Sum Investment

For a lump sum investment of $10k, the results in 10 years, 20 years and 30 years if the annual rate of return is 5% are the following:

Duration	Asset Value	Asset Value Change
10 years	$16.29k	$6.29k
20 years	$26.53k	$10.24k
30 years	$43.22k	$16.69k

Asset value gains faster in the last 10 years than the beginning 10 years.

Math Derivation for Lump Sum Investment Result Formula

Suppose the interest rate is 1%, and we save $100 in the bank for a year and get an interest payment of $1. 

The reult of this investment after a year is $100 + $100 X 0.01 = $100 X (1 + 0.01) = $100 X 1.01 = $101. 

The next year we save the original $100 plus its interest $1 of total $101 for another year, how much interest do we get? 

We will get $101 X 0.01 = $1.01 as interest, and the end result of the second year is $101 + 1.01 = $102.01. 

The equation for this investment after 2 years is $102.01 = $101 + $1.01 = $101 + $101 X 0.01 = $101(1 + 0.01) = $100(1.01)(1.01) = $100(1.01)². 

As we continue the same process, we get 

End result = Lump sum X (1 + annual rate of return)^years

Compounding Effect for Dollar Cost Averaging Investing

For a dollar cost averaging investing of $1k monthly, the results in 10 years, 20 years and 30 years if the annual rate of return is 5% are the following:

Duration	Asset Value	Asset Value Change
10 years	$155.28k	$155.28k
20 years	$411.03k	$255.75k
30 years	$832.56k	$422.53k

Start investing at the age of 20, and at age of 50, we would have $832.56k.

Math Derivation for Dollar Cost Averaging Investing Result Formula

This formula shows the result of yearly investment starting at year 1, not year 0 as right now. If we want the monthly investment result instead, we divide the annual rate of return by 12 and multiply t by 12.

For an Investment Goal of $500k

Lump Sum Investing

To reach the $500k investment goal at the age of 60, the earlier we start investing, the lesser the amount of money we need to invest.

Starting Age	Amount Needed
20	$71.02k
30	$115.69k
40	$188.44k

If we starting investing at the age of 20, we just need $71.02k to reach the $500k goal at the age of 60.

Dollar Cost Averaging Investing

To reach the $500k investment goal at the age of 60, the earlier we start investing, the lesser the amount of money we need to invest monthly.

Starting Age	Amount Needed
20	$0.6k
30	$1.22k
40	$3.22k

If we starting investing at the age of 20, we just need to invest $600 monthly to reach the $500k goal at the age of 60.

Investment Result Calculator (Please Enter Numbers)

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