One of the common objections to building an investment portfolio is that people feel they “aren’t wealthy enough” to start thinking about investing their money. Frankly, we believe that you can start to build future wealth regardless of your income and stage in your career. To demonstrate, let’s conduct a little experiment.
How much do you think you spend daily on coffee? $4? $6? $10? Or maybe you’re on a first-name basis with your barista and spend the majority of your disposable income on Fair-Trade Colombian Supremo full city roast? How much do you think you would have, if you had one less cup a day, and invested the money you saved?
Let's say you buy two cups of coffee a day at $2 each. What would happen if you halved your coffee consumption and invested the savings? Well, we know that the average annual rate of return of the stock market has been around 6% after inflation. So if you invested that $2 instead of buying coffee, your $2 would be worth $20.57 in 40 years. If you invested 30 days worth of saved coffee, you’d have around $620 in profit each year. And if you invested a full year’s worth? $7,508! And what would your investment look like if you did this for your entire working career? You’d have One Hundred and Eighty Thousand Dollars!1
I don’t know about you, but that sure gets us energized.
What makes this increase possible is something called “Compound Interest” — the idea that any interest on your initial principal amount becomes part of your principal, earning further interest. Thanks to compound interest, even relatively small amounts like the $2 used to buy a cost of coffee can become huge sums if given a long enough time period.
There’s three key takeaways from this:
- Starting an investment fund earlier increases the length of the investment period, giving your initial investment a greater time to compound and grow.
- Even if you don’t think you have enough money to start investing, the smallest amounts can grow into a substantial amount if invested wisely and given enough time.
- Just changing your spending habits ever so slightly can yield a huge positive benefit for your finances in the long-run.
As you can see, it's really never too early to start thinking about saving your money and planning for long-term financial success. Regardless of the stage of your life and career, there are tons of things you can do to begin the path of saving and investing. Here at Wealthsimple, we can help you create a plan and give you a variety of tools to make following that path unbelievably simple.
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- Assumes you place $14 ($2*7) a week for 46 years into an investment that earns 6%.