Albert Einstein once said that the most powerful force in the universe was compound interest. What most people don’t understand is that, while powerful, compound interest needs a lot of time to work.
Unfortunately, when most people start looking for financial planner, or stock broker, or just researching how to invest on their own, they start with unrealistic expectations of how rich investing can make them. The most important thing to remember is that it takes money to make money, even in investing. If you aren’t starting with a million dollars, you won’t be making a million dollars any time soon.
How Fast Can Investing Make Me Rich?
When a lot of people start investing, they start with something like their 401k plan or other retirement plan. Usually, they contribute a small part of their paycheck each month. Over time, the money adds up nicely, but not to the extend that makes anyone excited. After saving up some money outside of a retirement account they start thinking about online trading, or investing in something that grows faster. Not to put too fine of a point on it, they want to get rich fast.
Unfortunately, that isn’t really how investing works. If you don’t already have a lot of money, investing isn’t going to make you a lot of money, no matter how well you do.
Let’s say that you have $10,000 to invest. You can risk it all and invest in the riskiest investment strategy out there. Now, let’s say that I’m the best investor in the entire world. I’m so good that I earn you 50 percent return every year, with no fees or expenses. In other words, this is completely unrealistic.
There is no one who can do this. Not Warren Buffet, not the best mutual fund, not the best hedge fund, not even Bernie Maddoff’s ponzi scheme. No one. In fact, if you start talking about a 50 percent annual return with any financial professional anywhere, they will start talking you down, because 50 percent is utterly unrealistic. If someone could consistently return 50 percent per year, people would be banging down their door, no matter what the fee.
But if you could earn 50 percent return per year, how fast could investing $10,000 make you rich?
Let’s see what happens if you earn 50% on your money every year.
- Start Investing: $10,000
- After 1 year: $15,000
- After 2 years: $22,500
- After 3 years: $33,750
- After 4 years: $50,625
- After 5 years: $75,937
- After 6 years: $113,906
- After 7 years: $170,859
- After 8 years: $256,289
- After 9 years: $384,433
- After 10 years: $576,650
After a DECADE, you finally have half a million dollars.Now, at this point, compound interest really does start to work. Of course, you had to have a few hundred thousand dollars before it gets impressive, and remember we’re talking about very unrealistic returns here.
Not really what you were expecting is it?
What about the more standard 10 percent return on your investments?
How Much Can You Really Earn Investing?
There are just as many people out there who will tell you that a 10 percent annual return is unrealistic as there are who will tell you that a 10 percent annual return over time is completely realistic. It is important to remember that no matter which one it is, they are talking about average annual return, but for the sake of simplicity, how much would you have after 10 years at 10 percent?
- Starting with $10,000: $25,937
- Starting with $25,000: $65,843
- Starting with $50,000: $129,687
- Starting with $100,000: $259,374
- Starting with $250,000: $648,435
I don’t know about you, but until you get to $250K, those numbers don’t seem very impressive.
But, look what happens after 20 years:
- Starting with $10,000: $67,275
- Starting with $25,000: $168,187
- Starting with $50,000: $336,375
- Starting with $100,000: $672,750
- Starting with $250,000: $1,681875
Those numbers are a little more impressive. But, it took TWO DECADES to get there. Investing works, but it is not a way to get rich quickly.
What it all adds up to, is that investing is slow. All of those people out there who are billionaires didn’t get rich by investing $25K or even $100K. They got rich by running companies and businesses. Even then, it usually took decades.
As far as those who got rich “by investing”, they got rich by investing millions and billions of dollars. Even Warren Buffet didn’t get rich investing just his own money. He went out in the beginning and got people to invest millions of dollars with him. If he started with just $250,000, and somehow had the exact same track record, he’d have millions of dollars by now, but not billions.
When you start investing, be sure you understand the reality of expectations. Do some quick math to see how much money you would have, even if you doubled your money every year, and then realize that isn’t going to happen. But, if the 100% return numbers aren’t impressing you, you can be pretty sure that you won’t be impressed by what happens at 8 percent or even 10 percent either.
It takes a sizable starting investment to end up with a million dollars before decades have gone by. Always remember, compound interest is very powerful, but it is also very slow.