This is the story of 2 best friends. Their names are Alex and Jacob. Both of them are smart that’s why after graduating college both of them was able to land a very good job. At a very young age of 22, they were making good money. The difference between Alex and Jacob was their money management. Every payday, Alex always looks for an investment product that would make his money grow. Jacob on the other hand goes out partying with his colleagues and friends and goes on shopping every time. This is the trend for months and even years.
One day, Alex was able to look for an investment that would give him 10% compound interest every year. He made a commitment to invest Php 2,000 per month for a total of Php 24,000 per year. He even invited Jacob to invest his hard earned money and talked to him about preparing for his retirement. Jacob declined and told him that he will start investing when he gets promoted and gets an increase in his salary.
10 years later, at age 32, Alex started his own business. Unfortunately the business didn’t do well that’s why he wasn’t able to put more money in his investments. Fortunately for Jacob he’s still with the same company and was really doing well. At age 40, he got promoted to Vice President and decided to invest in the same vehicle where Alex was investing years ago. Since he has a lot of money to spare, he decided to invest Php 4,000 per month or Php 48,000 annually with the same 10% compound interest. After 10 years, at age 50, Jacob realized that he wants to be a rockstar, it was his passion. He was able to release his first album but it was a flop. This led Jacob to stop his investments.
Just to give you a summary:
Alex started investing at age 22 / Php 24,000 per year for 10 years at 10% compound interest
Jacob started investing at age 40 / Php 48,000 per year for 10 years at 10% compound interest
At age 60, the two best friends bumped into each other. They talked about their investments and this is what they found out. Alex started early and invested a total of Php 240,000 while Jacob started late and invested a total of Php 480,000. Who do you think has more savings??? Jacob has a total savings of Php 2,182,624.00 while Alex has a total savings of Php 6,067,604.36.
How did that happen? That is the power of compounding interest. Alex gave more time for his money to grow. Even if he stopped investing at age 32, his money keeps on growing because of compounding interest. We all know that Jacob invested twice as much but didn’t earn as much since he didn’t give his money that much time to grow. Always remember, Time is Money.