Most potent but undervalued tools in financial planning is time. To build long-term wealth, the sooner you begin investing, the greater your potential for financial success. James copyright While it's tempting to put off investing till you've paid down debt or earned a larger income, and "know better," however, beginning early--even with modest amount can be a big difference because of the effectiveness of compounding. In this article, we'll discuss the ways that investing early can build wealth over time, using the real-world experience, data, and practical strategies to enable you to start investing today.
Fundamental Principle of Compounding
The primary reason for early investment is a straightforward but incredibly mathematical concept: compound interest. Compounding implies that your investments do not only make returns but also begin earning returns on their own. Over time this effect of snowballs can transform modest investments into substantial wealth.
Let's illustrate this using an example that is simple:
Imagine you invest $200 per month beginning at age 25 in an account that earns an average per year return of 8percent.
After age 65, your investment could increase to more than $622,000, and your total contribution would be only 96,000.
Imagine you waited until you turned 35 before beginning investing the same $200 each month.
By age 65, your investment would grow to just $274,000--less than half of what you'd earned if you had started 10 years earlier.
Takeaway: Time multiplies money. The earlier you begin beginning, the more powerful compounding gets.
Time in the Market vs. Timing the Market
Many people fret about "timing markets" or "timing the market"--trying to buy low and then sell it high. Yet, studies show that the amount of time you invest with the market is far more important than perfect timing. Starting early gives you more years in the market, 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 decide to invest prior to an economic downturn, having your investment made before starting gives you an advantage of time for recovery and growth. Delaying because of fear of the market will just put you further in the sand.
Cost-of-living averaging for beginners: The Beginner's best friend
If you decide to invest a certain amount of money at regular intervals regardless of market conditions, you're using one of the strategies known as "dollar-cost averaging" (DCA). This minimizes the risk of investing a large sum when it's not the right time and builds a habit of consistent investing.
Early investors can take advantage of DCA by putting aside small amounts regularly, like from your monthly salary. Over time, these small contribution amounts can be significant.
The Opportunity Cost of Waiting
Every year you delay investing by a year, you're losing out on the cash you could have accumulated, you're also missing an opportunity to benefit from the compounding effects of that money.
So, for example, investing $5,000 when you are 20 years old and earning the rate of 8% per year, turns into $117,000 at age 65.
If you wait until 30 to invest that same $5,000, it can grow to only $54,000 at age 65.
That delay of 10 years has cost you more than $60,000.
This is why investing in the early years isn't just a smart choice, it's usually the most important decision in building wealth.
If you invest young, you are taking more (Calculated) Risks
Younger individuals have more time to bounce back from market downturns. This enables you to take on more risky investments such as stocks. They offer greater potential for returns in the long term compared to bonds or savings accounts.
As you age and move closer to retirement, it is possible to slowly change your portfolio into safer investments. But the first years are your chance to build your wealth through riskier strategies, with higher returns.
Being early allows you flexibility in your investment. You can afford to make a blunder or two to learn from them, and still come out ahead.
The Psychological Benefits of Starting Early
The early start builds more than financial capital. It develops faith and discipline.
If you begin to develop the habit of investing during the 20s or 30s, you will:
Learn about the volatility and ups and downs of market.
Make yourself more financially knowledgeable.
Peace of mind can be gained by watching your wealth increase.
Avoid the anxiety of trying to catch up later in life.
Also, you can free up your last years to live a full the moment instead of rushing to save.
Real-Life Example: Sarah vs. Mike
Let's take a look at two fictional investors in order to reinforce the main point.
Sarah begins investing $300 per month from age 22. She ends her investment at 32, just 10 years into investing. She doesn't add another dime.
Mike will wait until he reaches age 32 and invests $300 per month until age 65, a total of 33 years.
At 8% average return:
Sarah's investment $36,000, which increases and reaches $579,000 when she turns 65.
Mike's investment $118,800 rises to $533,000 by age 65.
Sarah made just a third as much, but ended up with more wealth simply by beginning earlier.
How to Begin Investing Early: Step-by-Step
If you're certain it's time to get started, here's a an easy guide to get started with early investing:
1. Start with A Budget
Find out how much money you can afford to invest every month. For example, $50 to $100 is a good beginning.
2. Set Financial Goals
Are you investing in retirement? A home? Financial freedom? Clear goals help guide your strategies.
3. Open an Investment Account
Start with your IRA, Roth IRA, or a taxable brokerage account. Some platforms don't have minimums and offer automated investing.
4. Choose Index Funds with Low Costs or ETFs
Instead of picking individual stocks consider investing in diversified funds that follow the market. They are low-cost and offer solid long-term returns.
5. Automate Your Investments
Make recurring monthly contributions for a consistent investment. Automation helps you avoid the temptation to make a bet on the market or to avoid investing.
6. Avoid paying high fees
Choose accounts and investments with low ratios of expense. High fees eat into your earnings significantly over the course of time.
7. Stay the Course
The investment game is long. Ignore short-term market noise and concentrate on your long-term goals.
Common Excuses -- and Why They're Costly
Here are a few reasons individuals put off investing, and why they can cost you:
"I'll start with more money."
Even the smallest amounts increase over time. Waiting just means less time for growth.
"I have debt."
If your interest rate on debt is less than your expected return from investments, it often makes sense to do both--pay down the debt and also invest.
"I do not know enough."
You don't have to become a financial expert. Begin with index funds and discover as you proceed.
"The market is extremely risky."
The longer your investment horizon is, the more time you'll have to take advantage of the ups and downs.
The Long-Term View The Long-Term View: Generational Wealth
The benefits of investing early aren't only for those around you. It also impacts your family over the years.
Setting up a solid financial foundation earlier can give you the chance to:
Buy a home.
Contribute to your children's education.
Retire comfortably.
Leave a financial legacy.
The earlier you start, the more you can give and the more financially secure you become.
Final Thoughts
The early investment stage is probably the nearest thing to a financial superpower most people have access to. It's not required to have a six figure income, a finance degree, or even a precise timing for building wealth. You'll just need patience, consistency, and discipline.
If you start early, even with tiny amounts, you're giving your money enough time to build into something significant. The biggest error isn't in choosing the wrong investment or missing out on a great stock -- it's being too slow to begin.
Begin today. Your future self will be grateful to you for it.