Principle #6: Time is Your Most Valuable Asset

Procrastination is a mysterious force that keeps many of us from completing the most important tasks in our lives. Often, we put off something we deem important simply because we believe it may not necessarily be urgent.

We know it is important to save for our future, but we typically underestimate the damaging effect of delaying this task. Most fail to realize the tremendous power of time and the impact it has on our ability to create wealth. We simply do not understand what’s at stake.

Ironically, for many, by the time they realize the power of time, it’s far too late in life to have meaningful impact on their financial well-being.

“Most people overestimate what they can do in a year and they underestimate what they can do in two or three decades.” – Tony Robbins

The Power of Compounding

Compound interest or, more generically, a compound rate of return allows you to make money using the money you just made. This is illustrated in the following example.

Assume you invest $1,000 and earn a 10% annual rate of return on your investment. Simple math would tell you that you’d expect to earn $100 on your investment at the end of the first year (10% of $1,000 = $100). At the beginning of the second year, your investment would be worth $1,100 ($1,000 initial investment plus $100 interest you earned in year one). This amount will earn you an additional $110 at the end of the second year (10% of $1,100 = $110). The table below shows the interest earned in subsequent years.

Note in the above that with a 10% compound rate of return, an investment doubles in a little bit over 7 years.

The “Rule of 72”

Calculations like the above can be simplified by using an approximation commonly referred to as the “Rule of 72”. The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual compound rate of interest. It provides a reasonable estimate in most practical cases (typically between 2% and 25%). By dividing 72 by the annual rate of return, investors can obtain a rough estimate of how many years it will take for their initial investment to double in value. 
Referring to our example, the “Rule of 72” estimates it would take 7.2 years for an investment to double at an annual compound rate of return of 10% (72/10 =  7.2). In reality, it takes about 7.3 years to double. 
Similarly, the “Rule of 72” estimates it would take 6 years for an investment to double at an annual compound rate of return of 12% (72/12 = 6). In reality, it takes 6.12 years to double at that rate.

The Value of $1 a Day

If you saved and invested just $1 a day starting at the age of 25, how much money would you have by the time you’re 65 if you could earn a compound rate of return of 11% per year? Think about this for a moment and write down your answer on a piece of paper before you check your answer here.

Starting Late

In spite of the power of compounding, most people start investing too late. Missing the first 10 years of your investing life (typically age 25 to 35 for most people) is extremely punitive. Unfortunately, its compounding (wealth-creating) time they will never get back. To drive the point home, answer the following question.  If you could choose, would you rather
  1. Invest $50,000 and end up with $1,100,000; or
  2. Invest $125,000 and end up with $570,000?
Think about this and write down your answer on a piece of paper before reading this.
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