The Real Reason We Should Start Investing When They’re Young!July, 21 2022
Investing isn’t mysterious. Everyone can do it. You don’t need specialized knowledge of finance, markets, and economics to start investing. Anyone trying to sell you an investment that you don’t understand after a reasonable amount of explanation, either doesn’t understand it themselves, or they’re trying to sell you something scammy or too complicated. Move along! There are enough ways to invest your money out there that are understandable, uncomplicated, and profitable.
… But Magic Happens When You Invest.
The most important thing is to start investing early and consistently. As Naved Abdali said, “Investing is not about a once-in-a-lifetime opportunity. It is a life-long journey of prudent investments that grow with time. You need to start small and let the magic of compounding do its trick.”
Let’s unpack the magic that is compound interest.
Compound interest is the interest you earn on interest. When you invest, you put your money to work for you. If you put $1000 in a simple savings account with a 1% interest rate, at the end of one year, you will have $1010. At the end of the second year, you will earn another 1% on your original $1000, and 1% on the $10 you earned in the first year, bringing your total earnings in the second year to $10.10 and your account balance to $1020.10. Now, interest rates on savings accounts are usually dismal, but the magic is that after earning that first $1,000, you don’t have to work anymore. Your money does the work.
To truly see the benefit of compounding, you have to give it time. Let’s say you buy an apartment for $300,000 and rent it out for $1,800 per month (or $21,600 per year). This will earn you a return of 7.2% a year. In addition to earning a monthly income from your investment, the property is also likely to appreciate over time. Let’s imagine that after 10 years, the property values have risen, and you can now sell your property for $400,000. In 10 years, your original $300,000 investment has turned into approximately $616,000 with $100,000 in appreciation, and 216,000 in rental income over 10 years. This example does not include rental increases over time, nor does it take into account repairs and maintenance you will have to do.
Start When You’re Young
The earlier you start, the longer your investments have time to build wealth for you. In the following two examples, we’ll look at investments here at Astor Realty and show how starting at age 25 or 35 can make a dramatic difference in how much wealth you can accumulate over time.
If you start investing at 25, we can assume an investment period of 40 years until you reach the age of 65. Let’s use an example of investing $25,000 each year into a real estate project with Astor Realty Capital at a conservative 10% return. Using these parameters, you will end up with $12.1 million at the end of 40 years! You would have invested $1m of your own money and earned $11.1 million in returns from your investment.
On the other hand, if you start investing 10 years later and reduce the period of investing to 30 years, things look like this:
In this second scenario, you would have invested $750,000 and earned returns on your investments of $3.7m. Quite a difference!
To experiment with different numbers, you can check out the investment calculator I used.
The Power Of Compounding
Your first investment of $25,000, with a return of 10%, will earn you $2,500 after a year. This amount does not mean financial freedom. You won’t be able to stop working tomorrow. There will be a period in which you have to keep investing to give your investments time to grow.
What the above two examples don’t take into account is the effect of reinvesting your returns. For example, you could take the returns from Year 1 and use this to reduce the amount of new money you need to invest in Year 2, say $22,500 + $2,500 you earned in Year 1. Another option would be to increase your investments using your returns, for example, $25,000 in Year 1, $27,500 in Year 2, $30,000 in Year 3, etc. This latter approach would send your returns into another dimension and cause the wealth-building snowball that you set in motion to start rolling even faster down the hill, growing exponentially in size without you having to do any pushing.
The Astor Advantage
What sets Astor apart from other firms is our investor-first approach and our conservative yet high yield-driven methodologies in Astor’s core values. We offer investors an alignment of interest with a seasoned team of professionals and access to institutional-grade real estate projects. In addition, our High-Net-Worth individuals enjoy our collective bargaining which results typically in hyper returns to their bottom line.
Astor Realty Capital is an institutionally backed firm investing LP equity in ground-up and value add projects across major US markets with offices in Manhattan, Miami, and Phoenix. Astor has participated in over 3.5 million square feet of real estate projects as of 2022 valued at more than 2 billion dollars and growing. We bring creativity and unlimited growth to our firm, business partners, and investors.