Investing Early: The Time Value of Money

27 June 2022

Investing Early: The Time Value of Money

27 June 2022

The best-selling financial book in Canadian history was David Chilton’s The Wealthy Barber. (It even outsold my own Million Dollar Strategy).  Both books and authors agree that saving early in your life is fundamental to investment success.

David Chilton captures this in his phrase, “pay yourself first.”  Too many people believe that they should buy a car; a house and other essential and put off saving and investing until later in life.  They miss two essential of investment success with this approach.  First, the longer your money is invested the more it will grow.  Second, an array often viewed as alphabet soup of vehicles RRSPs (Registered Retired Savings Plan) and TFSAs (Tax Free Savings Plan) exist to make it easier to start saving and investing.  RRSPs allow a deferral of income by as much as four decades.  TFSAs also shelter income earned without tax.

An early saving plan will allow you to take advantage of compounding and the rule of 72.  What is this rule?  If you take your annual return and divide it into the number 72 it will tell you how many years it takes for your money to double.  How does this magic of compounding work?

72 ÷ (8%) = 9 years

72 ÷ (10%) = 7.2 years

72 ÷ (6%) = 12 years

Invest early and Invest Often.

Let’s take an 8% return which is the one-hundred-year average return for equities.  Dividing 8 into 72 means your money would double in 9 years.  So, if you invested $10,000 at age 25 it would grow as follows.

25 + 9 years = 34 year $20,000

34 + 9 years = 43 years $40,000

43 + 9 years = 52 years $80,000

52 + 9 years = 61 years $160,000

61 + 9 years = 70 year $320,000


As these numbers demonstrate if you start in your twenties, you will see your original $10,000 become $320,000 in 45 years.  If you only started at age 43 then your $10,000 would become only $80,000 by age 70.  Earlier is better!  Pay yourself early as well as first.

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