When should I start investing?
You may have heard the Chinese proverb: the best time to plant a tree was 20 years ago. The second-best time is now. The same is true with investing. If you think you’ll have time to get started later, you should see how that’s working out for older generations.
The power of compound interest
If you wait to invest, you miss out on a huge advantage – compound interest. An urban legend says that Einstein once called this the most powerful force in the universe.
Compound interest means the money you invest earns interest, and your interest earns more interest. This allows the growth of your money to accelerate with time. If you start early, you will give your invested dollars a better opportunity to build on each other. The following example shows the true power of this:
Amber saves and invests $5,000 a year between the ages of 25 and 35, and then she stops saving. Jeff does not start saving until age 35. He then saves and invests $5,000 a year for the next 30 years.
Amber has saved a total of $50,000 (10 times $5,000) and Jeff has saved a total of $150,000 (30 times $5,000). They both earn an average of 10% a year on their investments (average historical return of stock market).
Who do you think has more money at age 65?
Amazingly it is Amber! She has a little under $1.4 million. Jeff ends up with $822,000, 41% less than Amber, even though he saved three times more of his money. This is because he started 10 years later. This is why it makes sense to start investing sooner rather than later. You can play with the numbers yourself using a compound return calculator.
Should I pay off my debt first?
This question comes up often. I usually recommend setting aside some income to invest while paying off debt. Even if the interest rate on your debt is higher than the expected return on your investments, it is psychologically important to see your wealth grow as your debt goes down. Otherwise, it can be tough to stick to your debt reduction plan. For instance, you can set aside 10% of your income for debt repayment and 10% for investing. Once your debt is paid off, you can double your investment contributions. No amount is too small – even $50 per month can go a long way.
So when is the best time to start investing? Right now!
James Mwombela is a Certified Financial Planner™ professional who helps clients make educated financial decisions in order to live their best lives. He began learning everything he could about managing finances during college in order to have more financial stability than he experienced growing up. He became determined to share this knowledge with others so they could experience the same confidence and freedom of choice.