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The Story of Prudence & Extravaganza
October 20, 2010 at 8:53 AM
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When investing, what you get back depends primarily on 4 factors:
Most people get overly concerned about the third point – the rate of return. Whilst this is obviously important and can make a significant difference, the most important weapon in your investment armoury is available to all and is completely free – it is quite simply, time. The sooner you start, the richer you will become – simple as that.
PrudenceConsider the story of two 25-year-old sisters, Prudence & Extravaganza. Prudence has understood the magic of compounding and started to save £1,000 per year in 2002 and gets an average return of 9% per annum*. She invests for 10 years only and then stops. She doesn’t pay in another penny for the next 25 years but leaves her investment until age 60 in 2036 when it is worth £131,009.
ExtravaganzaExtravaganza has been living the high life for 10 years and now thinks she had better start putting some money away for her future. She starts savings £1,000 per year at exactly the point when Prudence stops. Extravaganza also achieves 9% per annum average return but she doesn’t stop after 10 years. She keeps investing for another full 25 years until she is 60. She has invested 150% more than Prudence over the 35 year period and what is her fund worth at the end? £84,701 - only 65% of her sister’s investment fund. No matter how long they keep saving, Prudence will always have more, despite the fact she only invested £10,000 – and that is purely because she started early.
Find out more about Online Investment Management here |
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In previous articles, we have shown you how to get wealthy. This time, we thought we would share with you our No.1 tip: Start Early! If you do, you can let the magic of compounding take hold and carry you towards financial freedom.|
End of Year Prudence Extravaganza |
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2002 £1,000 £0 |
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2003 £2,090 £0 |
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2004 £3,278 £0 |
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2005 £4,573 £0 |
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2006 £5,985 £0 |
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2007 £7,523 £0 |
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2008 £9,200 £0 |
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2009 £11,028 £0 |
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2010 £13,021 £0 |
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2011 £15,192 £0 |
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2012 £16,560 £1,000 |
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2013 £18,050 £2,090 |
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2014 £19,675 £3,728 |
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2015 £21,446 £4,573 |
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2016 £23,376 £5,985 |
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2017 £25,480 £7,523 |
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2018 £27,773 £9,200 |
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2019 £30,273 £11,028 |
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2020 £32,997 £13,021 |
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2021 £35,967 £15,192 |
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2022 £39,204 £17,560 |
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2023 £42,732 £20,140 |
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2024 £46,578 £22,953 |
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2025 £50,770 £26,019 |
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2026 £55,339 £29,361 |
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2027 £60,320 £33,003 |
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2028 £65,749 £36,973 |
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2029 £71,667 £41,301 |
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2030 £78,117 £46,018 |
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2031 £85,147 £51,160 |
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2032 £92,810 £56,764 |
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2033 £101,163 £62,873 |
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2034 £110,268 £69,532 |
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2035 £120,192 £76,790 |
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2036 £131,009 £84,701 |
* This is an example rate of return and is based on the Fidelity Special Situations Fund, which (as at 1st July 2009) had a 10 year annualised return of 9.71%.
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