Why it is better to start investing early

ABS-CBN News

Posted at Oct 11 2014 08:40 AM | Updated as of Oct 11 2014 04:40 PM

MANILA -- One investor proved that the earlier you start saving or investing, the more your money will work for you.

Tyrone Charles Solee explained how investing early led him to his first million in less than five years.

Solee started saving at the age of 21, when he had his first job after graduation.

At the age of 26, after less than five years of employment, Solee already earned his first million by living below his means, investing, and through different instruments.

Solee took advantage of compounding interest, which is basically the interest on interest.

"Compounding interest is a double-edged sword," Solee said on ANC's "On The Money." "So, he who understands it, earns it, while who who doesn't, pays it."

"It depends on your situation. If you're a saver or investor, compound interest will multiply your money. But, if you have loans in the bank, the tendency is if you left it unpaid, compound interest will drown you," he added.

Time is essential in compounding, making one earn more money the earlier he or she starts investing.

"You have to start early as you can. So, the more time that you have, the better the chances that your money will grow and multiply," Solee said.

Aside from time, taxes, inflation rate, and management fees should also be taken into consideration.

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"Taxes and inflation rate should be considered. Taxes and inflation rate are basically the enemies of compounding, whereas time is the ally of compounding," Solee explained.

"Taxes diminishes the income from the power of compounding the income, and inflation rate diminishes the value of your money. If you will invest, make sure you invest in an investment instrument that beats the inflation rate," he added.

Solee also advised those who are planning to invest to choose investment instruments with the lowest management fees.

"If you are to invest, on a longer term, make sure that you choose the investment instrument that has the lowest management fees."

Solee explained two options for those who are planning to invest. One option is to invest early and wait for the benefits (delayed gratification), and one is to enjoy the benefits first and invest later (instant gratification).

For option A, Solee advised younger people to start investing P35,000 per year from age 25 to 30 years old. After investing for five years, one can just watch his or her money grow at 12 percent per year until he or she reaches 50 years old.

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For the second option, one can start investing P35,000 per year at the age of 31 until he or she reaches 50 years old, earning 12 percent per year.

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Comparing the interests earned in these two options, Solee explained that those who opted for Option A will earn P3.07 million, while those who chose Option B will only earn P2.8 million by the age of 50.

Solee advised new investors to regularly invest a fixed amount of money at set intervals over a long period of time, ideally from 5 to 10 years.

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"When you invest, your money can buy fewer shares if the market is up, and consequently, your money can buy a lot of shares when the market is low. On the longer term, you are on the average of your investments," he said.