BACK in 1990, when I wrote my second book More Money, I included a chapter called "The Fairy Godmother and the Magic Train". The intention was to show the power of compound interest, and it told a fable about a fairy godmother who visits all new parents to tell them about a train that could take the child to wealth.
The fare to take the journey is just $2.74 a day ($1000 a year) provided the parents start immediately, and the payoff is that the child should have more than $6 million at age 65 which is the end of the journey. The figures are based on the assumption that the money is invested in quality share trusts, and that the trusts earn an average of 10 per cent a year if all income is reinvested.
A seat on the train costs virtually nothing if they start paying that $1000 a year from year one. However, as each year passes its value grows as compounding works its magic. Therefore, a person who delays starting the program will have to pay an increasingly heavy price to join the train if they wish to have the same sum at age 65 for an investment of just $2.74 a day.
Time passes quickly. This month we found ourselves celebrating the 21st birthday of our youngest child. It only seems such a short time since we had three children under four now they are aged 21, 23 and 24.
Yes, the magic train is a great concept unfortunately, like most people, I never got around to starting. However, being one who likes to ponder on what might have been, I did some calculations to find out what the outcome would have been if I had made the time to invest that paltry $1000 a year into a managed fund that matched the All Ordinaries Accumulation Index.
The eldest, now aged 24, would have $164,000, the second would have $122,000 and the youngest, who just turned 21, would have $89,000. Notice the impact of time on the investment. Because the youngest is four years younger than the eldest, her theoretical portfolio would have been worth about half as much as his, because the length of time of her investment would have been four years shorter.
It encouraged me to do some more calculations. If we made no more contributions to the eldest son's $164,000 portfolio, it would grow to $8.8 million at age 64 if the investment could average 10 per cent a year. That's a return of $8.8 million for a total investment of $24,000 (24 years x $1000).
Now think about somebody who is reading this, who is aged 24, and becomes sold on the idea of having a portfolio worth $8.8 million in 40 years time. Because they are starting from scratch they have to invest $1380 a month ($16,560 a year) to reach their target of $8.8 million.
Yes, the person who put away $1000 a year from birth and then stopped at age 24 outlays only $24,000 for a return of $8.8 million. The one who delays the program and then starts at age 24 has to find a staggering $662,400 to end up in the same place. This is the cost of delay.
Naturally this raises the question that we must all ask ourselves: why don't we start these programs? Probably because deep down we all have an active impatience gene that makes us resist any course of action where results only appear over time.
It's easier to choose a harsh lose-three-kilograms-in-seven-days diet than one that requires a slight adjustment to our eating habits that will result in our losing six kilograms in 12 months.
There is also the age-old problem of getting so involved in immediate problems that we neglect planning for the future. Maybe, with a new financial year approaching, it might be a good time to reflect on what we have done in the past 12 months to get some money working for us. Remember, the three main places money can come from are you working, your money working, or from welfare.
Welfare is being continually tightened so if you intend to ever give up work it makes sense to start accumulating some capital for your retirement as soon as you can. The earlier you start the easier it is.
Noel Whittaker is joint managing director of Whittaker Macnaught, AFSL number 246519. Email him at
[email protected]. This advice is general in nature and readers should take their own expert advice before making financial decisions.
