I first learned this lesson during the snowdays of my childhood and it's remarkably relevant to your investments. As the old saying goes, "You don't have to be rich to invest but you have to invest to be rich." Compounding is one of the most powerful tools in our personal finance toolbag. It works best when growth starts early and remains uninterrupted for years. Your future self will be happy you did.
Growing up in Denver, CO every winter consisted of me impatiently waiting for the next snowfall — mainly because I loved playing in the snow. So how does snow in Denver relate to personal finance? Snowmen!
Snowmen relate to personal finance because just like snowmen don't magically appear in a blizzard, you won't magically be rich one day. Wealth and snowmen both have to be built, and the first thing you have to do is just get started. The base takes the most effort — every snowman begins as a small snowball packed tight with your hands, then rolled until it grows too big to push further.
Throughout our lives, we will want to accomplish so many things. As a kid, I wanted to build a snowman. Today I am building a financial planning firm dedicated to helping lawyers live the life they deserve. If we want something in life, we have to be the ones to make it happen. The first step is you have to just get started.
A tale of two lawyers
Take two lawyers. The first graduates law school and starts investing at age 25 — $1,000 per year for six years, then stops contributing entirely. The second is nervous about investing and never contributes for six years. After talking with the first lawyer at a BBQ, the second decides to catch up by investing $1,000 every year going forward, eventually contributing $30,000 total by age 60 — $24,000 more than the first lawyer's $6,000. Both portfolios grow at exactly 12% a year.
Surely the second lawyer, who invested five times as much, ends up ahead? Wrong. At age 60, the first lawyer's portfolio is worth $272,300. The second lawyer's is worth $270,300. The first lawyer retires with more money despite contributing $24,000 less over his lifetime — because he just got started.
Understanding compounding
Compounding interest describes how investments grow by an increasing dollar amount even though the percentage change stays the same. Consider two $1 investments: one grows 10% daily, the other increases by a flat $0.10 daily. After day one, both are worth $1.10 — the last day they're equal. From there, the compounding investment pulls ahead exponentially. At the end of 40 days, the compounding investment is worth $45.26, while the flat-growth investment is worth just $5.
Notice that at day 30, the compounding investment is only worth $15.86 — it grew nearly $30 in the last 10 days alone. Imagine if you had waited 10 days before investing over those 40 days.
"Just get started" isn't a self-help book title (although it would be a good one). It's a reminder that in finance and in life, time gives you the best chance for success. You will be better off in the future if you start today.
Your path toward a career in law started well before you graduated — a small step, followed by a bigger one, until you were where you are today. The next step is taking control of your finances so you can compound your career success into the dream life you deserve. You will not become financially free overnight, but you will never be financially free until you just get started.
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