There are three variables that impact the total return investors receive from an investment: the amount saved, the return rate, and the amount of time invested. Most investors spend a good amount of time and effort trying to increase all three. But what if we can’t do all three, if we’re inhibited by time, skill, knowledge, or ability (after all, many fund managers spend a lifetime trying to eek out an additional 1% return with limited success.) If we could only focus on one of the factors to impact, which is the best option? What is the best way to maximize investment returns?
When you increase the amount saved by 20% per year, your overall increase is 20%. This seems to make sense and be “fair.” But if you increase your return rate by only 12.5%, you get a 20.3% increase in the total, a much better result. Yet when you save for an additional five years, a 16.7% increase in time, you get a much, much better return — an increase of 46.9% total.
In other words, the amount of time you save has the biggest impact on your total return by far.
So what does this mean? For younger people, it means they should save as much as they can as early as they can. Someone in their 20’s still has a great many years ahead of them. The best thing they can do to influence the amount of money they earn throughout their lifetimes is to save and invest as much of it as they can right now. Starting immediately and keeping at it for 30 or 35 years will give their investments a tremendous boost.
For those of us who are older, it means we need to start saving now. Even though we have less time, the more time we have our money working, the better total return we can expect. The old saying certainly holds true in this case: “The best time to plant a tree is twenty five years ago. The next best time is today.”
And for you over-achievers, if you increase all three factors (something we all really should be trying to do), you get a marvelous result:
If you do all three — increase the rate, increase savings, AND increase time — you really get a huge impact. The amount at the end of the 35 years grows to 129% more than the initial scenario.
The Best Way to Maximize Your Investment Return [Free Money Finance]