An investor who begins to save later in her or her working life will require a higher investment amount over a longer time period to catch up to an investor who began to save earlier in her or her working life.
For example: Let’s say the person who began earlier started saving $10,000 a year from Year 1 and saved for a total of only 8 years. The person who began later starts saving the same amount, but from Year 9 onwards and does so for the next 25 years.
In the case of the former, a total investment amount of $80K grows to $787K in 33 years at 8% CAGR. The late saver had to invest $250K and takes 25 years to catch up to the early saver’s account value. In this example, the late saver required efforts 3-4x greater than the early saver both in investment amount as well as in the time it took to achieve the same amount of investment earnings as that of the early saver.
Asset growth benefits from the compounding effect, which has two components, time and rate of growth. This example illustrates the power of the time component of compounded growth. Refer to “Power of Compounding” and “Asset Growth Using Rule of 72” to further appreciate how compounded growth helps build assets.
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