The formula for becoming wealthy and financially independent is fairly simple, though applying it can be challenging. It goes like this: save and invest as much as possible, starting as early as you can. If you begin in your early-20s, you could achieve your wealth goals by your mid to late 30s, rather than having to wait another 30 years or more before you can finally retire and enjoy life to its fullest.
With this as the foundation for building wealth and retiring early, I may be patient, but I’m not that patient. Therefore, I try to maximize my contributions over a shorter period, rather than contributing smaller amounts and extending my time horizon. In other words, it’s better to maximize contributions now to shorten the time horizon, rather than stretching it out.
Let us demonstrate with some scenarios on how starting early and contributing a lot can get you to an early retirement a lot faster:
Scenario 1: Contributing Little and Stretching the Time Horizon
Individual A:
- Monthly Contribution: $100
- Investment Period: 40 years
- Expected Annual Return: 7% (average return of most indices)
Calculation:
- Total Contribution Over 40 Years:
$100 × 12 months × 40 years = $48,000 - Future Value:
After 40 years at 7% annual return, the investment will grow to approximately $262,000.
Outcome:
- Financial Independence: Individual A will need to wait 40 years to reach approximately $262,000, assuming a consistent 7% return.
Scenario 2: Contributing More to Condense the Time Horizon
Individual B:
- Monthly Contribution: $1,000
- Investment Period: 20 years
- Expected Annual Return: 7%
Calculation:
- Total Contribution Over 20 Years:
$1,000 × 12 months × 20 years = $240,000 - Future Value:
After 20 years at 7% annual return, the investment will grow to approximately $520,000.
Outcome:
- Financial Independence: Individual B will reach approximately $520,000 in 20 years, assuming the same 7% rate of return.
Summary:
- Individual A: Contributes $100 per month over 40 years, growing to approximately $262,000.
- Individual B: Contributes $1,000 per month over 20 years, growing to approximately $520,000.
Conclusion: By contributing more upfront, Individual B shortens their path to financial independence, while Individual A takes a slower, more gradual approach. Although the second individual must contribute significantly more over 20 years, starting early and being diligent with their money—sticking to a budget and earning extra income from side hustles in addition to their main job—can set them up for success before they turn 40.
I often say that I wish I had known in my early 20s what I know now—I would have started building wealth much sooner. While I’ve always been good with money and saving, I’m embarrassed to admit that I didn’t know much about investing and didn’t start until my late 20s. A whole lost decade or more. In fact, I didn’t get serious about it until my mid-30s. My goal is to help others who are still young, so they don’t waste time and wait until their 30s or 40s to get serious about money and wealth building like I did.
Start now by saving and investing as much as you can. Even if you are in your late 30s, 40s or 50s, it is never too late and it is better to start now than 5 or 10 years from now.