When is the best time to invest

When is the best time to invest?

If you are thinking of starting your investment journey, the earlier is better for getting the full benefit of compound interest.

POSTED ON 21 JANUARY 2019

This is probably the first question you wonder about as a new investor. To leverage the power of compounding interest, it is better to start your investment as early as you can.

The Power of Compound Interest

For example, you have invested $1,000 with an annual market return of 10% per annum. At the end of first year, you will earn $100 over the period. For the second year, you earn interest on the initial principal PLUS the accumulated interest you have so far, which is $1,100. In other words, you will have $1,100 X 1.1 = $1,210, after the end of your second year.

Compounding interest means accumulating interest on the initial principal and the interest earned from it. In other words, it simply means, “interest on interest”.

Let's look at the following illustration

Introducing John and Sally – 2 parents who want to get their children's college fund ready for when they turn 20. Let's assume the compound interest on the market returns is at 5% a year.

John, a first-time father, decides to start early and invest S$1,000 monthly for 10 years. After which, he will stop contributing but leave the money invested in the market for the next 10 years.

Monthly investment of S$1,000
John's Daughter
Age Monthly Investment EOY Bal.
1 S$12,330.01
2 S$25,290.86
3 S$38,914.78
4 S$53,235.74
5 S$68,289.39
6 S$84,113.24
7 S$100,746.66
8 S$118,231.09
9 S$136,610.04
10 S$155,929.28
11 S$163,906.92
12 S$172,292.71
13 S$181,107.53
14 S$190,373.33
15 S$200,113.19
16 S$210,351.37
17 S$221,113.34
18 S$232,425.92
19 S$244,317.2
20 S$256,817.01
Total investment: S$120,000
EOY big
End of Year Balance when child turns 20: S$256,817.01

Sally decides to only start investing when her son turns 10. She contributes S$1,500 monthly for 10 years.

Monthly investment of S$1,500
Sally's Son
Age Monthly Investment EOY Bal.
1
2
3
4
5
6
7
8
9
10
11 S$18,495.03
12 S$37,936.29
13 S$58,372.21
14 S$79,853.68
15 S$102,434.19
16 S$126,169.94
17 S$151,120.06
18 S$177,346.68
19 S$204,915.09
20 S$233,893.94
Total investment: S$150,000
EOY small
End of Year Balance when child turns 20: S$233,893.94

So here's the magic of compounding interest. When their children both turn 20, John who has contributed less ends up with a larger sum than Sally who has contributed more! Due to the snowball effect of compounding interest, he has benefitted from investing earlier.

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