The Cost of Waiting to Build Wealth

Procrastinating on building wealth is not the best idea. By the end of this article, you’ll know exactly what I mean. I’ll break it down to two basic principles for this theory.1

Compound Interest

This is the first concept to understand well. There is mathematical advantage to starting to save and build wealth as soon as possible.

Let’s define a some terms.

Definition of Interest

1. “Money that is charged by a bank or other financial organization for lending money”
2. “Money that you earn from keeping your money in an account in a bank or other financial organization”

Definition of Compound Interest

“Interest that is calculated on both the amount of money invested or borrowed and on the interest that has been added to it.”

This is usually calculated annually, by the way.

Example of Compound Interest:
Deposit $100 into an account earning 10% interest annually
Year 1: $10 in interest is added, totaling $110
Year 2: $11 in interest is added, totaling $121
Year 3: $12.10 in interest is added, totaling $131.10
Year 4: $$13.11 in interest is added, totaling $144.21
Year 5: $14.42 in interest is added, totaling $158.63
Year 6: $15.86 in interest is added, totaling $174.49
Year 7: 17.45 in interest is added, totaling $191.94

As you might have noticed, the $100 initial deposit almost doubled in amount after 7 years.

The Power of Time

The second concept to understand well. Let’s talk about the Rule of 72.

It is a math hack you can do to calculate how long an account will take to double in value.

Take 72 and divide by the interest rate that you are earning (this applies to being charged interest too by the way!)

Example:
72 ÷ 10 = 7.2

That means the money in that account would approximately double every 7.2 years. If you see the compound interest example earlier, you can see this is pretty spot on.

Whenever you’re looking to build wealth, ask yourself:
How long will it take me to double my money?

Combining the Two

What happens when we combine the principles of Compound interest and The Power of Time?

Well, once you’re in the mindset of how long it will take to double your money, have some familiarity with Compound Interest, then the next question to yourself should be:
How many times can I double it until I need or want it?

If we take that same example of 10% interest, knowing it doubles every 7.2 years. Let’s take a look and see how it plays out.

Example of a 30 yr old starting to save:
Let’s say they can leave the money in that account for 30 years, which would be around retirement age, and let’s also say they start with $10,000 one time deposit.

Year 1: $10,000
Year 30: $174,494.02
That’s $164,494.02 in interest alone!



Example of a 29 year old starting to save:
Let’s do the same example, but let’s say this person started just one year earlier. So this means that they would wait 31 years.

Year 31: $191,943.42
That’s $17,449.40 more in interest because they started just a year earlier.

So yes, waiting even just one year could potentially cost you tens of thousands of dollars or more.

I have one more example for the parents who are reading.


Example of parents opening an account for they newborn child:
Let’s say they can start with $10,000 as well, just for easier comparison.

Year 1: $10,000
Year 60: $3,044,816.40
That’s a huge difference, isn’t it? The only factor we changed was time!

Hopefully now you are getting the hang of this. So the Power of Time really is a major advantage to leverage when it comes to building wealth.

That’s great Sherif, but where do I get 10%?

Now, when it comes to investing and building wealth, the interest that is earned is usually variable (goes up and down depending on the market).

It’s unheard of that someone gets 10% for 30-60 years straight. But that’s what we should focus on. What should be our focus is the average and especially the actual performance of whatever account we’re looking at. As well as a few other factors (like risk tolerance and the timeframe of when the money might be needed/wanted), before deciding to put any money into it!

A financial professional who knows your personal situation can help you determine which strategies are best for you.2

Looking for a Financial Professional?

Summary

Waiting can cost you a lot of money.

Children have the best opportunity to benefit from the simple fact that time is on their side by being able to allow the money to sit longer and be around to benefit from them.

This doesn’t mean adults shouldn’t start as soon as they discover these facts. The lesson to take out of this, is start now, whatever you can do is better than nothing.


  1. For education purposes only. This is not financial, legal or tax advice. Consult the appropriate professional before implementing a strategy to make sure you find the right solution for your specific needs. ↩︎
  2. Not financial advice. ↩︎

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