Two people walk into a coffee shop and spend 20$ each. One of them is 20 years old and the other one is 60 years old. Are both of those 20$ worth the same?
I bet your first thought is to say: Yes, 20$ is 20$...
But they are not worth the same and I will explain to you why.
There is a concept called Opportunity Cost. Wikipedia defines it as the loss or benefit that could have been enjoyed if the alternative choice was chosen.
Throughout your life, you have choices to make. Those choices however have a bigger impact the younger you are.
If you invest 20$ in the stock market, it will be worth (according to historic returns) 140$ when you are 60 years old. Spend 100$ in a bar or restaurant and your opportunity cost is 700$ when you’re 60 years old…
The second thing to look at is the time you had to trade in order to get that coffee and donut for 20$. You most likely had to work for an hour to 90 minutes to pay for it. So it costs you 20$ plus 90 minutes of your time.
Compound interest is what makes your money fructify like that. You earn interests on interests. And compound interest’s best friend is time. Warren Buffett started investing at 11 years old but 99% of his wealth was acquired after 50 years old. That’s how compound interest works.
As far as the 60 year old who also spent 20$ in the coffee shop, his 20$ really only cost him 20$. His opportunity cost is low because even if he invested his 20$ instead of using it at the coffee shop, time is no longer on his side. He can't use the magic of compound interest anymore. Or at least, he can't benefit from it as much.
He’s also probably retired by now or close to being retired so he didn’t have to trade 90 minutes of his time to get that coffee and donut.
The 60 year old’s opportunity cost is a lot less than the 20 year old’s
The moral of this story is that every little choice you make will have an impact on your life. And those choices weigh heavier the younger you are.
Because of compound interest, investing 100$ when you are 60 years old is next to useless whereas investing 100$ when you are 20 will be worth a lot more a few decades later.
Start making the right choices early! Most of all, make the choice to keep on learning.
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