If You Haven’t Started Investing, Start Now!

This post is a ‘sneak peak’ at the book I’m writing…enjoy! Andrew

Jockeying with Bill Gates for the title of “World’s richest man” is a fellow named Warren Buffett.

He lives like a typical millionaire (he doesn’t spend much on material things) but he knows of a secret that I’m going to share with you: the secret of investing your money early.

Buffett bought his first stock when he was 11 years old, and the multi-billionaire jokes that he started too late. Starting early is the greatest gift you can give yourself. If you start early, and if you invest efficiently (in a manner that I’ll explain in the book) then you can build a fortune over time, spend only about 10 minutes a year on your investments (no, you don’t have to monitor your investments any more than that) and you can spend much of the money you earn from your job on the “finer” things in life.

Warren Buffett, however, chose to live modestly. He still lives in the same house he bought in 1957 for $31,500. And for Buffett—who’s often described as history’s greatest investor—he’s more interested in building his massive fortune so he can help the world by donating it to Bill Gates’ charitable foundation. Buffett and Gates are far more interested in spending their combined fortunes on Global Health, for example, than they are on the latest luxury items. Very cool.

But you can have a bit of both—enough money for a few luxurious goods today, and a small fortune that (if you’re so inclined) you could use to help the charitable foundations of tomorrow.

Again, it’s all about starting early—or what Buffett refers to sometimes as the “Noah Principle”, which allows for the magical work of compound interest (something I’ll explain later).

Most of us are aware of the Biblical story about Noah’s Ark. God told him to build an Ark, collect a variety of animals, and eventually, when the rains came, they’d sail off to a new beginning. Luckily, Noah started building that Ark right away. He didn’t procrastinate.

But let’s imagine Noah for a second. The guy probably had similar qualities to you and me, so even if God told him to keep the upcoming flood a secret, he might not have. After all, he was human too. So I can imagine him wandering down to the local watering hole and after having a couple of early Budweisers, whispering, “Hey, listen, God is saying that the rains are going to come, and that I’ll have to build an Ark and sail away once the land is flooded.” OK—some of them (maybe even most of them) might have figured that Noah had probably eaten some kind of naturally grown narcotic. A crazy story—they’d think.

Yet, somebody must have believed him. As crazy as Noah’s flood story might have sounded to his buddies, somebody had to have been inspired to build their own Ark—or at least a decent sized boat.

Despite the best of intentions, though, that person obviously never got around to it. Maybe he planned to build it when he acquired more money to pay for the materials. Maybe he wanted to be sure: to see that the clouds were getting dark. Or maybe he wanted to wait until it started raining. Pivotal moment.

Warren Buffett likes to say that Noah didn’t start building the Ark while it was raining. He started building it right away. And if you want to grow a fortune over time, you’ll want to follow this advice, because it’s far more powerful than you could ever imagine.

If you start investing early, you’ll leave many people behind in the financial race. Thankfully your friends won’t meet the same fate as Noah’s friends, but your ship will sail off into the distance while many of them will eventually scramble in the rain to assemble their own boats.

But starting early is more than just getting a head start. It’s about using magic. You can sail away slowly, and your friends can come after you with racing boats. But thanks to a force described by Albert Einstein as more powerful than splitting the atom, they aren’t likely to catch you.

In Shakespeare’s Hamlet, the protagonist says to his friend, “There are more things in heaven and earth, Horatio, Than are dreamt of in your philosophy”

Hamlet was referring to ghosts. Einstein was referring to the magic of compound interest. It benefits the early bird in a nearly supernatural way.

Breaking the magician’s code

Compound interest might sound like a complicated process, but it’s actually simple.

If $100 gains 10% interest in one year, then we know that it gained $10, turning $100 into $110.

During the second year, it would now be valued at $110, and if it increased 10%, it would gain $11, turning $110 into $121.

During the third year, it would now be valued at $121, and if it increased 10%, it would gain $12.10, turning $121 into $133.10.

It isn’t long before a snowball effect takes shape. Have a look at what $100 invested at 10% annually can do over the below time periods:

$100 at 10% compounding interest per year turns into—

  • $161.05 after 5 years
  • $259.37 after 10 years
  • $417.72 after 15 years
  • $672.74 after 20 years
  • $1,744.94 after 30 years
  • $4,525.92 after 40 years
  • $11,739.08 after 50 years
  • $78,974.69 after 70 years
  • $204,840.02 after 80 years
  • $1,378,061.23 after 100 years

Some of the lengthier time periods above might look dramatically unrealistic. But someone who starts investing at 19 (like I did) who lives until they’re 90 (which I hope to!) will have money compounding in the markets for 71 years. They’ll be spending some of it once they retire, but they’ll always want to keep some of their money compounding—in case they live to 100.

But you’re crazy to invest money if….

Before getting wrapped up in how much money you can save and invest, there’s one very important thing you need to clear up. Are you paying interest on credit cards? If you are, then it makes no financial sense to invest money. Most credit cards charge about 18% annually. Not paying them off in full at the end of the month means that someone else is compounding money at your expense, to the hungry tune of 18% a year. Money that you pay off on your credit card could be considered an “after tax” savings of 18%. Remember that if the banks are making 18% off you, but you cut their revenue stream off, then you are saving 18%.

Even if you’re paying a “low interest” credit card charging 12% annually, it’s still financially crazy to invest money if you’re keeping a balance on your credit card. After all, paying off the credit card debt is like making a tax free 12% gain on your money. And there’s no way that your investments can guarantee a gain like that after tax. You might make 12% annually after taxes, and you might not. But if any salesperson or advisor suggests that they can guarantee that you’ll make 12% annually, turn from them and walk away. I’ll talk about the empty promises many “advisors” make later, while discussing why they make those promises, and then trying to steer you clear of them in the future.

The inspirational realities of starting early

After paying off your high interest loans (whether they’re car loans or credit card loans) you’ll be ready to put Buffett’s Noah Principle to work. The earlier you start, the better, so if you’re 18 years old, start now. If you’re 50 years old, and you haven’t begun, there’s no better time than the present.

The money that doesn’t go towards expensive cars, jewellery, and credit card payments(because these are paid off) can compound dramatically in the stock market if you’re patient. And the longer your money is invested in the stock market, the lower the risks.

We know that the markets can move up and down a lot. It can even move sideways for many years. But over the past 80 years, the U.S. stock market has generated returns exceeding 9% annually. And this includes the crashes of 1929; 1973/74; 1987 and the crash of 2008/2009. For the past 200 years (as long as we have records) the stock market has proven that it can take a licking and keep on ticking—upwards and upwards and upwards.







Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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22 Responses

  1. Thanks to the prodding of my Dad, when I was 14 I put some money in a RRSP. I basically had no idea what a RRSP was, I just mostly did it because my Dad told me too. Same thing when I was 15 and 16.

    When I was 17, I started asking my Dad a lot of questions about investing and coming home during my breaks from school and watching the business channel. I didn't understand much, but was an eager student. I started investing not much after my 18th birthday and haven't looked back.

    In hindsight, I was a bit of a crappy investor back then. I've sure learned a lot from my journey so far. The beauty of investing is that in another 10 years I'll look back and see how much I've learned. I am glad I started so early.

  2. The greatest gift I consider for my kids is to start them with a solid dividend investment to show them the reality of compound growth. By the time they are 20, I would hope for them to have learn and seen at least 10 years of growth.

  3. Financial Uproar:

    I love hearing stories like yours because your dad actually taught you to fish. I don't think it matters that you weren't a good investor in the beginning. It was probably a pretty cheap education, in relative terms. And I'll bet you're a darn good investor today—especially relative to the rest of your friends who weren't as lucky to get a financial education like you did.

    Passive Income Earner:

    I think you sound a lot like Financial Uproar's dad. Do you encourage your kids to add to the fund with their own money as well? I think this might be the key: educate them as investors and savers at the same time.

    Financial Uproar–did your dad do the same thing? Did he make sure you contributed to your investments as well? Things obviously worked out for you, and I'd love to hear your take on this. I have been wondering how I can help my nieces and nephews with money—so any details that either of you guys can share on the issue of financial empowerment would be greatly appreciated.

    Thanks!

    Andrew

  4. DIY Investor says:

    My inspiration was actually a biographical book report I did in junior high school. Ive always thought it was about John D. Rockefeller but haven't been able to find it since so it might have been about someone else. Anyways it told of the person as a youngster carrying water to construction workers and taking his earnings and buying a wheelbarrow and then another wheelbarrow and then hiring his friends. By continually putting his money back in the business he got his money to work for him. This struck a chord with me.

    Later when I saw the math like you layout on the principle of compounding I was hooked. I saved regularly and put "windfalls" such as bonuses in my savings.

    Today I have choices and to me that's what it is all about.

    Compounding is a powerful force!

  5. DIY Investor:

    I think you and I view money similarly—as something that gives us choices. I used to want to race to retirement, but then I saw that money gave me choices to work or not, to travel or to volunteer.

    Getting cancer this year wasn't something I expected. And my wife and I have discussed working just one more year at our current jobs, and then travelling for a few years, taking a volunteer job or just re-locating. Money just gives us a choice, which is great.

    We do enjoy our current jobs though, so we'll have to see what we end up doing.

    Considering your early interest in money, how old were you when you started investing?

  6. DIY Investor says:

    I started when I was 19. Wasn't easy. I walked into a Merrill Lynch office and they laughed at me. I didn't have enough. Finally I learned about Quick and Reilly. In those days it wasn't easy. I would get up in the morning, run out to get the newspaper and find that my stock had gone up up 3/8s or down 3/8s.

    It was a few years later, when I learned about options that I really got going. It's funny but in those days we would hear the sob stories about those who missed out on IBM etc. Well, looking back we had the same opportunities. They look easy in hindsight but are not in real time! At least that's my take.

  7. Exactly, money gives you the freedom to make choices that you might not otherwise be able to make. I only wish I had started my savings much earlier than 25, which is when I did…

  8. Ooh your book sounds great!!

    Let me know when it's published so I can go out and get a copy =)

  9. @DIY Investor

    DIY Investor:

    Those brokers were fools to have laughed at you. If they coaxed and flattered you, who knows, you might still be with them today. One of my favorite lines was when I was test-driving a slightly used BMW. The dealer asked me, "Can you afford this car?" and I asked him back, "Can you afford to be asking me that?" I'm not normally good with witty responses, but I look fondly back at that one!

    As far as opportunities looking a certain way, in real time, I read this once, and it sounds so true: The best investments always make you feel sick to your stomach when you're making them.

  10. @Kevin@InvestItWisely

    Hey Kevin,

    You're lucky in so many ways. You've started earning and investing money with the market at reasonable levels. Anyone starting ten years ago was somewhat doomed, with the silly PE levels. Plus, you have such a great head on your shoulders. You're going to do exceptionally well over the years. I know that because you're wired to think in a contrarian fashion. How do I know that? I know that because when we have discussed and debated whether people are born to invest or whether they can learn to control their emotions, you side with the "it's easy to learn to control your emotions" side. You know how I feel about this. You're something like an Olympic 100 meter runner who claims it's easy to break 11.2 seconds in the 100. For you, metaphorically speaking, it is. That's why you'll end up very rich—with loads of choices!

  11. @youngandthrifty

    Thanks Young,

    With some luck, I can flog a dozen copies to you. I'm just thinking of all the relatives that you could buy Christmas presents for. OK–I'm dreaming. But I'll try making it as entertaining and informative as I can. Thanks for the support Young!

    Andrew

  12. I started investing in my early 20's, after I got my first full-time job in Toronto. I remember having money to go out, have some fun, put gas in my car, pay my bills and still have some money left over. I remember coming home from Toronto one weekend to visit my parents, and telling them about my new-found "freedom" for university; enjoying my first full-time job.

    I recall over dinner, my Dad saying something to the effect, "…sounds like you're having fun, just don't forget to pay yourself first son". That comment stopped our conversation. It caught me off guard. It didn't ruin dinner, but it certainly changed the conversation pretty quick! I hadn't been doing that, rather, simply enjoying life as it came. After dinner, I reflected on what he told me and I realized it was his way of telling me to save some money for me, for retirement; for something new; for a trip; for an emergency. In his youth, he wasn't afforded (literally) an opportunity to save. He had siblings to help raise at home, during his childhood, and he got married quite young. As a consequence, my Dad never really had any chance to pay himself first. I realized his comment over dinner was his way of educating me on finance, though he never had an opportunity to educate or apply his learnings himself.

    David Chilton's Wealthy Barber mantra aside, my Dad knew paying yourself first was the best way to start building wealth and financial security, by starting early and often, as much as you could; 1%, 5%, 10%, whatever. Although I started investing in crappy balanced mutual funds that grew very little during my 20's, at least I was doing something. That action made me proud then, and now.

    While I know I have so much more to learn about personal finance and investing, I feel like I'm making progress on both and that dinner conversation over 10 years ago made a lasting, great impression on me and triggered my financial awareness.

    Great post Andrew!

    .

    After a brief conversation with my Dad, I came to realize that he wanted me to pay myself first, because

  13. Hey Financial cents:

    It looks like the tail end of your comment was cut off. I'd love to hear the end of the story if you wouldn't mind finishing.

    The one thing the bloggers in this little community of ours have in common is that they all started early on with the help of a mentor.

    The reason I'm writing this finance book is that kids can go through highschool (even a really good highschool like the one I teach at) and not have a clue about money when they graduate—unless they have dads like your dad, which the vast majority don't.

    The average kid ends up financially inept after finishing highschool and university. And that's where the problems occur. We have a great business department in our school, and there are a couple of great teachers who are going to be showing kids how to buy common stocks, but we miss out on all the "real" stuff: credit cards, mortgages, depreciating assets vs. appreciating assets, mutual funds/index funds (which most people end up buying). Buying individual stocks might be "sexy" but most people doing it would be better off with (even!) expensive mutual funds, I think. Otherwise, they end up doing really silly things with their money, gambling.

    You were lucky that your dad got you going so early on.

  14. Thanks for the shot of optimism, Andrew! And, that was a great line to use on that BMW dealer. I wonder what the look on his face was after that. By the way, I am also looking forward to the book!

  15. Thanks Kevin!

    Now that a few of my online friends know about it, I'll be more motivated to finish it. You know what they say about setting a goal: make sure you tell someone about it so you're held accountable!

    I fondly look back at what I said to that BMW dealer Kevin. And honestly, it was out of character for me to say that kind of thing. But it sure was funny then, and it's just as funny now, looking back on it.

  16. Mike says:

    Hi Andrew,

    I think this is the kind of advice we can all agree on regardless of our investment styles and backgrounds. Thanks for pointing this out.

    Becoming a better investor and adhering to an investment discipline is important, however we all really need to focus on those things we completely control like:

    -Starting early as pointed out in this post

    -Increasing the percentage of our salary we put away

    -learning how to spend less and save more

    -increasing our income so we can save even more

    I believe these things (especially starting early) are MOST important. And, I am glad to see you writing about it – the basics seem to get lost sometimes amidst all the market chaos.

    Take Care, Mike

  17. Cheers Mike,

    As I progress through this book, I'd love to get your insight on some of these chapters as well. I think I'll post the odd chapter, with the hope that I can get some guidance.

    Kevin gave me some good advice on the last one: to meausure the S&P 500 as a fairer market representation than the DOW. I used to the DOW because it was easier for me to find the data. But Kevin is right. And he gave me a site that will give me some helpful historical data.

    Please feel free to put me straight as well. Your insight, as always, is greatly appreciated Mike.

    Cheers,

    Andrew

  18. Angie says:

    Hi Andrew, I get stuck with the compound interest calculation for Star, which is in your book (Page 41).
    With $45 per month as the Principal amt, start at the age of 5, at age 65 (which is 60 yrs later) and average of 9% per annum, I am not able to get $1,050,080 which is 1 million.
    If I use $540 as the Principal, compound yearly at 9% per annum, I only get $95,057.
    If I use $45 as the Principal, compound monthly at 0.75% per month, I only get $9,765.
    Can you give me an idea how do you get 1 million? Thanks in advance.

    Regards
    Angie

  19. Angie says:

    Hi Andrew,

    Thanks for responding. I have not received your email. Have you sent?

    I am using the compound interest formula
    A = P (1+r/100)^n

  20. Angie says:

    Hi Andrew, I found my error. =) Sorry to trouble / disturb.
    I took only $540 as Principal and no more additional of the same amt every year.
    Not bad, it means if I only invest $540 at the beginning, it means we can roll to almost 100k in 60 yrs time.
    Thanks for replying me. =)

    Regards
    Angie

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