ASN

Notes by Akhil Saji

Visualizing the impact of time on investing

Introduction

Most investing books emphasize the significance of investing early and frequently. However, the tangible benefits of beginning your investing journey as early as possible are often difficult to comprehend until substantial time has elapsed, and the consistent investing habit has been firmly established. In this series of graphics, I illustrate the importance of starting early by comparing various investment time horizons.

Investing $1000 monthly

Investing a few hundred dollars alone can be challenging for most Americans due to the impact of higher inflation and rising costs of living. Aspiring to a monthly investment goal of $1000 is a worthwhile goal that can significantly improve your net worth. Establishing this habit early on is crucial for achieving financial success.

1k-monthly

In this hypothetical scenario, an investor makes a monthly contribution of $1000 into an S&P500 fund. Initially, over the first five years, the wealth increase perception is quite limited. However, when the investment period is extended to 20 years, which is four times longer, more than half of the investor’s wealth accumulation can be attributed to the compounding effect of monthly investing.

Increasing monthly contribution amounts

How does increasing the monthly contribution amount affect wealth accumulation? The graph below illustrates that raising the monthly contribution directly accelerates investment returns, even in the early stages of investment.

varying-monthly-individual

I have also summarized this into one graphic

compiled-monthly-contribution

Conclusion?

Investing early and frequently is a crucial yet often overlooked aspect of investing. By treating investing like any habit, such as exercise, we can compound the benefits over extended periods. Additionally, increasing the investment amount directly impacts the speed of wealth accumulation, enabling investors to appreciate higher returns at earlier time horizons.