The massive and surprising power of investing early

The most important thing about investing is starting early.

I want to show you something… (the image is a bit dated, which explains the dates cited below, but the point still holds)

(This post was originally published in 2016 and then updated in 2021. Everything substantive in this post is accurate as of 2016, now we have four kids! I just checked the account in late 2023 and it's over $500,000 with no additional contributions. It's all market returns!)

That Rollover IRA at Vanguard contains money from every employer-sponsored 401(k) I've contributed into. It's subjected to the same annual contribution limits as any other 401(k) plan, so I have no special advantage outside of just saving a lot. And early.

I don't have my historical contributions handy, those papers have long been shredded and my account access terminated, but if I were to guess my contributions were less than $100,000 total and employer match accounts for probably another $215,000. The last contribution would've been made in 2008, when I quit my job to blog full-time.

What you see is the result of early savings compounded over the last ~12 years.

Since I didn't have my records, I was a little skeptical about how much I put in. But the S&P500 index has gained 97.06% since July 3, 2003 until January 14, 2016. It's plausible that my investment doubled in that short a time period. Vanguard's Total Stock Market Index historical performance is similar, $10,000 at the end of 2005 would be worth over $20,000 just 10 years later, albeit a bumpy ride.

I recognize I've been fortunate that I started a business that generated a nice side income. However, my Rollover IRA only contains contributions from the days when I was an employee. It's subject to the same rules as your 401(k) — which is to say annual contributions are capped at $18,000 (for 2015, it was less when I started working in 2003).

Saving and investing early will trump larger dollar contributions later.

This is a prime case of how smart work beats hard work. Investing early is the smart work.

Let's illustrate this with two extreme cases… Early Ellie and Late Larry.

Both start working at 20 and both want to “retire” at 60. The market returns 7% a year, compounded monthly.

• Early Ellie diligently invests $100 a month for ten years. She stops contributing when she turns 30 but leaves the money in the market for the next thirty years until she's 60.
• Late Larry waits ten years before he starts investing $100 a month into the stock market for the next thirty years until he is also 60.

(the average stock market return, Dow Jones Industrial average specifically, from 1965 – 2018 was 6.28%)

Early Ellie invests early, Late Larry waits and is, well, late.

Who ends up with more money? Ellie who has personally contributed $12,000 or Larry who has personally contributed $36,000?

• Ellie – $141,303.76
• Larry – $122,708.75

Ellie has contributed $24,000 LESS than Larry but because time is the friend of compound interest… she wins. By a LOT.

The power of saving and investing early is massive.

In investing, slow and steady is good. Early and often is better.

What if you want to retire a millionaire?

The answer is even simpler. If you start saving at 20 and retire by 65 (45 years later), with the same 7% return, you need to save $402.50 a month — $4830 a year. In retirement, you will have a nest egg of $1,000,420.38.

Nearly $5000 a year may seem like a lot, especially if you just entered the work force or you have a lot of loans to pay back. Not to worry, to reach a million dollars you don't have to increase your savings amount (but you should!). The more you're able to save early, the harder it will work for you later on.

As someone who is now married with two kids, there is no better time to save than early in your professional life.

Want to get started? Here's our guide to investing your first $1,000 in the stock market.