by Silicon Valley Blogger on 2008-06-13 37

Have you noticed that sometimes, the more we spend our time worrying about how we can become millionaires, the farther behind we find ourselves from reaching our financial goals? I find this pretty ironic. For instance, doing too much with our money can lead us to joining multi-level marketing or MLM schemes that promise us riches. or to day trading away our savings, or to starting businesses we arent truly prepared for. And it can lead us to financial setbacks that take even longer to make up for.

Sometimes, we may be trying too hard to get ahead when in fact, just some time and discipline will be enough to lead us to a financially fit end. There are ways to get rich without that much hassle, and Im one of those people who eagerly advocates this road to wealth.

The key is to invest in the stock market as early as you can.

While it may be late for some of us to maximize our lifetime investment potential, it may not be the case for our children. If you start an investment program early enough, especially for your kids, you could help them acquire a million dollars by the time theyre 40. Investing even with the simplest of portfolios can help get you to that point.

We can only envy those kids who began investing their lunch money in the markets when they were 16. Though I learned some basic investing concepts at a fairly early age (at 23) right after I started my first job, I do think that any kind of head start still counts for a lot.

How Early Investing Builds Your Wealth

Just to illustrate the value of investing early. see these charts showing how various investors have fared over time.

Invest early with less money, and you could still be ahead of those who save later.

In this example. one investor starts investing early but only contributes $2,000 a year to her investments. A second investor starts much later but even with higher contributions, does not catch up to the net worth of the first investor when they reach the age of 60. The assumption is that both investors earn 8% returns every year.

The only way a late starter can catch up is if he or she invests a potentially significant amount of capital at some point.

Time makes the difference.

Here is another cool chart courtesy of Motley Fool. showing that a simple lump sum investment done earlier can make quite the difference.

Even if you stop contributing, you could still be ahead.

And finally, I find it fascinating that there are situations when discontinued investment programs done early in your life can actually still BEAT the overall returns of someone who started much later but who continues to invest indefinitely.

This example from MainStay Investments may not reflect the above concept completely, but it provides the gist that you could have a hard time building the same net worth as someone whos started investing a lot earlier than you have:

In this hypothetical example, 10-year old Tim starts putting aside $500 a year until the age of 25 and then stops making contributions. Over this time, he puts aside a total of $8,000. On the other hand, Sally doesnt start making contributions until she is 46 and puts aside $4,000 a year until she reaches age 65. Over that time, her contributions total $80,000. In both cases, their account grows 8% a year. Despite the fact that Sally contributes 10 times as much as Tim, at age 65 her account is less than half the size of Tims account. This clearly illustrates the benefit of starting early and the power of compounding.

These are all great justifications for saving and investing in behalf of your kids, who could build a hefty portfolio by the time they are in their thirties. Granted, a million dollars in 30 or 40 years is not the same as a million dollars today, but its still a fortune. Or you can give them the equivalent of a million by setting up a 529 plan in their name. And if your kids are earning income, they should consider opening retirement accounts. Even just $300 a month in an index fund can get you very far, if you set up a program to contribute this amount over 40 years (test this idea using this calculator ).

But dont forget your own situation either fund your retirement accounts on a regular schedule as early as you can for there isnt a moment to lose. Your money is bored and would like to work hard for you, the sooner the better.

Categorized under: Investment Written by SVB