For my tenth birthday, my big brother took me to see Doug Henning. The Chicago Theater oohed and aahed over the bad-hair illusionist's bag of tricks. Me? Well, as much as I like to see people cut in half, my mind was glued to a different sort of magic.
Earlier that day, my uncle Jack, notorious Evanston dyspeptic, had given me a single dollar bill.
"A whole dollar," I sniffed sarcastically, as I griped to my dad about my uncle's cheapness.
"Wait a minute," came the reply. "If you double that dollar every year, what do you think it'll be worth in 20 years?
"Probably 100 bucks," I asserted, making the sort of financial misobservation that has since become my trademark.
"Actually," said the old man, sadly shaking his head and marveling at the distance this fruit had fallen from the tree, "it'll be more than a million."
A million from a dollar in 20 years! What voodoo spell could wreak that kind of arithmetic? Well friends and neighbors, it's called compound interest -- and it's the greatest friend to young investors since the invention of the bar mitzvah.
Compounding is simple, but incredibly powerful if given enough time. Basically, all it means is that you get interest on your interest. And the longer you keep your money invested, the more interest you have to receive interest on.
A lot of young people are discouraged because they have so little money to invest. What's the point, goes the thinking, of investing, say, a measly hundred bucks a month? Well, the best thing young investors have going for them is not the amount they can dedicate to investing, but the length of time they can afford to let their money ride, which is known as a "time horizon."
Sound too good to be true? Well, the example above probably is: If you could double your money every year (a 100 percent annual return), you'd be in prison, not Fat City. But let's examine a situation that's actually believable in the real world.
Two women, Alice and Trixie, begin working for Acme Products on the first day of 1960. Alice, her conservative father's words still burning her ears, was diligent about putting $100 a month in a solid growth-oriented mutual fund. Trixie, on the other hand, blew her discretionary dollars on mambo lessons and glow-in-the-dark wallpaper.
Exactly ten years later, Alice, having grown tired of the fact that a woman's work is never done, decides not to put a penny more in her mutual fund. Trixie, however, has met the vest-wearing, sewer repairman of her dreams and decided to mend her derelict ways. Starting that year, she puts $100 a month in the same fund that Alice held.
Cut to 1990. The fund has performed well, but not marvelously, earning 10 percent over the past 30 years (about the average that large stocks have earned since 1926). Trixie has contributed $24,000 and now has $75,937 -- more than tripling her money. But Alice, who contributed a total of only $12,000, is now sitting on over $150,000 -- more than 12 times her contribution.
Amazing, huh? What's more, Trixie will never catch Alice, even if she continues to contribute another hundred every month. (In case you're interested, the numbers after another 10 years are $226,049 for Trixie and $406,349 for Alice -- and remember, Trix had to pour in another 12 grand for that while Alice suntanned and strolled.)
So if you're sitting on top of just a little extra money each month, don't be fooled into thinking there's no reason to bother getting started on an investment plan. There are plenty of mutual funds that'll open an account for you with a starting balance of just $500 -- even less if you open it as an IRA or agree to deposit a set amount every month (both of which I recommend). Next time you find yourself thinking you'll blow a hundred bucks on records and beer, just imagine the pile of both you'll be able to buy 30 years down the road, when you'll really need 'em.
