As you can see, in 10 years the initial contribution has more than doubled, and the rate of return on the initial investment increases exponentially as the graph continues.
In other words, money put towards long-term goals, such as retirement, is worth more when it has more time to compound. You can learn more about compound interest in our article here.
Time horizon
Time horizon is something that should be taken into account when considering an investment plan. Time horizon can be simplified to “When will I need the money?”
Time horizon is often directly associated with risk tolerance: while higher-risk investments tend to have high reward potential, they also carry a greater risk for losses, especially if the market experiences a correction. While the market has historically bounced back after recessions,
it takes time to regain its value. If your time horizon is short, then you may not have enough time to recoup your losses before you need to withdraw your money.
Like compound interest, time horizon can be an advantage to investing towards long-term goals in your 30s. Since your plan likely involves spending decades in the market for goals like retirement, it might allow you to justify a strategy that features
higher strategic risk and greater potential returns.
Be sure to keep in mind that a long horizon isn’t a free ticket to make reckless decisions. It’s just another factor to take into account when taking calculated risks.
Interest vs. Returns
While this isn’t unique to investing in your 30s, it’s worth mentioning every time we bring up math: compounding isn’t a one-way street. Most outstanding debts will have some amount of interest associated with them. These debts should
be taken into consideration when working out an investment strategy. Basically, it boils down to:
“Is the interest rate on the debt greater than my expected returns?”
Generally, high-interest debts such as credit cards will have a higher rate of interest than one could expect in returns from most types of investment. Other debts, such as mortgages and car loans, often have scheduled payments and interest rates that
might be below your expected rate of return on your investment strategy.
Of course, there are other things to be kept in mind, such as how some loans have repayment schedules that include penalties for early repayment. Ultimately, it’s up to your own judgment where your money is best placed.