It's tempting to hold off investing in the event that you're not able to pay off your debt or earned more income or "know more," the truth is that beginning early, even with tiny amounts--can make a dramatic difference due to the power of compounding. In this article, we'll examine the ways that investing early can build wealth over time. James Rothschild We'll do this using real-world examples, data, and practical strategies to assist you in starting today.
A Theory of Compounding
The fundamental concept of early investing lies a basic but incredibly mathematical concept: compound interest. Compounding means your investments not only make returns but they also begin to produce returns of their own. In time this snowball effect could turn modest contributions into significant wealth.
Let's illustrate this with the following simple example:
Imagine you invest $200 per month from the age of 25 into a checking account which earns an average annual interest of 8percent.
At the age of 65, your investment will increase to over $622,000 in total, while your contribution would be only 96,000.
Imagine you waited until you reached age 35 to begin investing that same amount of money per month.
When you reach the age of 65 your investment will grow to just $274,000--less than half of the amount you'd earned if you had started 10 years earlier.
Takeaway: Time multiplies money. The earlier you begin and the earlier you begin, the more powerful compounding occurs.
Timing in the Market vs. Timing the Market
A lot of people worry over "timing an market"--trying to buy low and sell high. But studies consistently show that the amount of time you invest with the market is more important than timing it perfectly. Beginning early means you have more years of market experience, allowing your investments to be able to weather volatility in the short term and benefit from the long-term trends in growth.
Remember this: even if you make a decision to invest just prior to the recession, your early beginning still provides you with the advantage of time for recovery and growth. The delay due to fears of market conditions will only put you further in the sand.
Dollar-Cost Averaging: A Beginner's Best Friend
If you are able to invest a set amount of money regularly, regardless of the current market, you're utilizing a strategy called "dollar cost average" (DCA). This lowers the risk of investing a large sum in the wrong place at the wrong time, and establishes a habit of regular investing.
Early investors can take advantage of DCA by putting aside small amounts often, for example from the monthly pay. Over time, the small donations can accumulate significantly.
The Opportunity Cost of Waiting
If you're putting off investing for a year by a year, you're losing out on the cash you could have invested, but also missing completely the compounding effects of that investment.
For instance, investing $5,000 in the 20th year at an 8% annual return, it will grow into $117,000 by the time you reach age 65.
As long as you do not wait to 30, to invest that $5,000, it will grow to only $54,000 at age 65.
This delay of 10 years will cost you more than $60,000.
This is why early investing is not simply a smart move, it's the most important decision in building wealth.
Investing Younger Means Taking Higher (Calculated) Risks
As a young person, you get more time recover from market downturns. This allows you to invest in more aggressive options such as stocks, which can provide greater potential for returns in the long haul compared with savings accounts or bonds.
As you age and move closer to retirement, you'll have the opportunity to gradually change your portfolio into more secure investments. But the early years are an opportunity to increase your wealth using higher risk strategies, with higher returns.
Being early gives you flexibility in your investment. You can afford to make a mistake, or two then learn from it but still get ahead.
The psychological benefits of beginning Early
Starting early builds more than just financial capital, it builds credibility and discipline.
When you develop the habit of investing in your 20s and 30s, you'll:
Find out the ups and downs of markets.
Get more financial literacy.
Enjoy peace of mind watching your wealth grow.
Avoid the anxiety of playing catch-up later in life.
Additionally, you are able to free your later years to enjoy living your life without having to save.
Real-Life Example: Sarah vs. Mike
Let's review two fictional investors to drive home the issue.
Sarah begins investing $300 per month by the age of 22 and stops at age 32. It's just 10 years to invest. She doesn't invest another dollar.
Mike stays until he reaches age 32 and invests $300 per month up to age 65. He has a total age of 33 years.
At 8% average return:
Sarah's investment: $36,000, which increases to $579,000 at the age of 65.
Mike's investment: $118.800, which will increase by $533,000 at the age of 65.
Sarah gave only a third amount of money, but she ended up with more wealth simply by starting her career earlier.
How to start investing early: Step-by-Step
If you're convinced that it's time to get started, here's a beginners' guide to starting by investing in the early stages:
1. Start With A Budget
Know how much you can afford to invest every month. For example, $50 to $100 is a good beginning.
2. Set Financial Goals
Are you planning to invest for retirement? A house? Financial freedom? Specific goals guide your strategies.
3. Open an Investment Account
Begin with an IRA, Roth IRA, or a taxable brokerage account. Many platforms have no minimums or fees and provide automated investment.
4. Select Index Funds that are Low-Cost or ETFs
Instead of picking stocks individually invest in funds with diversification that mimic the market. They have low fees and decent long-term yields.
5. Automate Your Investments
Set up monthly recurring contributions to ensure you're consistent. Automated contributions help you resist the temptation of try to time the market, or even skip investing.
6. Do not pay high fees
Make sure you choose accounts and funds that have low ratios of expense. High fees eat into your profits significantly over time.
7. Stay the Course
Investment is a long-term game. Don't be distracted by market news and focus on your long-term objectives.
Common Excuses--and Why They're Costly
There are many reasons investors put off investing, and why those delays can cost you money:
"I'll begin when I earn more money."
Even the smallest amounts increase over time. Waiting just means less time for growth.
"I have the burden of debt."
If the interest rate you pay on debt is lower than your anticipated return on investment typically, it makes sense to make both payments: pay down the debt and then invest.
"I don't have the right knowledge."
There is no need for a degree to become an professional. Start with index funds and learn as you progress.
"The market is dangerous."
The longer the timeframe for your investment and the longer you have to be prepared for the ups and downs.
The Long-Term Perspective: Generational Wealth
Making an investment early isn't just beneficial to yourself. It could also affect your family members for generations.
The foundation of a solid financial base early gives you the opportunity to:
Buy a home.
Make sure you fund your child's schooling.
Retire comfortably.
Leave a financial legacy.
The earlier you start making your initial steps, the more money you're able give--and the more financially free you will be.
Final Thoughts
Early investing is the closest thing to a financial superpower most people have access to. There is no need for a six-figure income or a college degree in finance or a perfect timing to create wealth. All you need is time to be consistent, and a sense of discipline.
Beginning early, even if it's with low amount, you give your investment the time needed to grow into something powerful. The biggest error isn't in choosing the wrong option or missing out on a stock that's hot, it's having to wait too long before beginning.
Get started today. Future self thank you for it.
