Getting started early can help your money work harder
[Music in background throughout]
On screen copy:
Please read important information at the end of this video. Recorded on 11/02/2022.
Lauren Sanfilippo:
Hi. Oh, am I going? Sorry. [Laughs]
Hi, I'm Lauren Sanfilippo, Senior Investment Strategist with Bank of America's Chief Investment Office.
On screen copy:
Lauren Sanfilippo
Sr. Investment Strategist
Bank of America Chief Investment Office
A lot of people ask me, when's the best time to start investing? In my opinion, as soon as possible!
Early in your career, when every paycheck feels stretched, it's easy to tell yourself: I'll invest in a few years when I'm earning more.
But when you begin investing to help meet your goals for all the things you want to do later on—like buying a house, starting a family, educating your kids, or retiring to your dream location—the most important thing you can do is to start early, even if you've only got a little to put away at first. It's all about the power of compounding.
Compounding happens when your investments produce returns such as stock dividends or interest on bonds or money market funds, which you can then reinvest.
As you keep contributing and reinvesting, just like the snowball effect, momentum can really build.
Let's take a look at how this can work over a lifetime of investing.
On screen copy:
What might happen if you invest $50 a month from ages 20 to 60, with a 7% annual return?
This is a hypothetical example for illustration purposes only. Had a different growth rate been used in the example, the results would vary. No rate can be guaranteed.
[Animated graph showing how as contributions starting at age 20 increase to $24,000 after 40 years, total returns rise until they reach $120,000.]
Let's say you're 20 years old and decide to invest $50 per month in a hypothetical investment with a 7% annual return.
At first, there's not a huge difference between what you invest and what your total return looks like, but as the years go by, see how the lines diverge?
By age 60, after 40 years of steady saving and reinvesting, your $24,000 of contributions could return nearly $120,000.
On screen copy:
$50 per month from ages 20 to 60
This is a hypothetical example for illustration purposes only. Had a different growth rate been used in the example, the results would vary. No rate can be guaranteed.
[Bar graph showing how $24K in contributions yields $120K of total returns over 40 years.]
Now let's look at the potential cost of waiting.
Say you wait until you're 30, meaning you'll invest for 30 years instead of 40. Your income is higher, so you invest $100 each month instead of $50.
Even though your contributions are higher, coming into a total of $36,000, your money has less time to grow, producing a return of a little over $113,000.
On screen copy:
$100 per month from ages 30 to 60
This is a hypothetical example for illustration purposes only. Had a different growth rate been used in the example, the results would vary. No rate can be guaranteed.
[Bar graph showing how $36K in contributions yields $113K of total returns over 30 years.]
Let's say you start at 40. By now, you can put in $200 per month, but your total contribution of $48,000 over 20 years gives you just a little over $98,000.
On screen copy:
$200 per month from ages 40 to 60
This is a hypothetical example for illustration purposes only. Had a different growth rate been used in the example, the results would vary. No rate can be guaranteed.
[Bar graph showing how $48K in contributions yields $98K in total returns over 20 years.]
In other words, you're contributing twice as much money as you would have by starting at 20 for a total return that's more than $20,000 lower.
Now, of course, this example is hypothetical. All investing carries risks and fees. Unlike a bank account, an investment account is not FDIC-insured or bank guaranteed and may lose value.
But if you step back and look at what happens over a lifetime of investing, markets historically have produced steady growth.
That means, even factoring in the risks and uncertainties, starting early and investing steadily over time gives your money the potential to build and grow.
So starting with that base and increasing your contributions as your pay goes up can give compounding even more momentum.
So why not start now? Set aside a few extra dollars, give it some time, and get your investing off to a great start.
Is that good? Yeah, this is just like my apartment. I don't even have a chair. I have a couch. [Laughs.]
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