Start Today and Create a Financial Legacy
Start Today and Create a Financial Legacy
Blog Article
Most powerful yet under-appreciated tools in personal finance can be time. If you're looking to build long-term wealth, the sooner you start investing, the greater the chance of financial success. James copyright It's tempting to delay investing until after having paid off debt or earned a larger income and "know more," there's a good reason to starting early--even with small amounts--can make a dramatic difference because of the effect of compounding. In this article we'll take a look at how investing early will build wealth over time, utilizing concrete examples, data and actionable strategies to aid you in starting today.
Fundamental Principle of Compounding
The basis of early investing lies a simple yet powerful mathematical concept called compound interest. Compounding means your investments not only produce returns, but also begin with the ability to earn themselves. Over time this snowball effect will make modest contributions into significant wealth.
Let's look at this through an easy example:
Imagine you invest $200 per month, beginning at age 25, into a checking account which earns an average annual interest of 8%.
After age 65, your investment could grow to over $622,000 while your total contribution would be only $96,000.
Imagine you waited until you reached the age of 35 to begin investing the same $200 per month.
By age 65, your investment will grow to just $274,000--less than half the amount you'd earned if you had started 10 years earlier.
Takeaway: Time multiplies money. The earlier you start your compounding, the more effective it can be.
Timing in the Market vs. Timing the Market
A lot of people worry in regards to "timing market timing" market"--trying to buy cheap and sell quickly. But studies consistently show that the duration you are trading is much more important than the perfect timing. Starting early gives you more years of market experience that allow your investments to endure short-term volatility and profit from the long-term trends in growth.
If you invest right before the recession, your early start will still give you the advantage of time for recovery and growth. In the event of putting off investing due to fear of market conditions will put you further in the sand.
Dollar-Cost Averaging: A Beginner's Best Friend
If you commit to investing a set amount of money on a regular basis, regardless of market conditions, you're using an investment strategy called "dollar cost average" (DCA). This helps reduce the chance of investing a large sum in the wrong spot and also helps to establish a pattern of consistent investing.
Early investors can make use of DCA by putting aside small sums every month, such as from an income stream that is paid monthly. Over time, those little contributions can add up to a significant amount.
The Cost of Opportunities of Waiting
If you're putting off investing for a year in the first place, you're missing out on the money that you could have invested. You're missing an opportunity to benefit from the compounding effects of that investment.
As an example, a $5,000 investment when you are 20 years old and earning the annual rate of 8% will turn into $117,000 at age 65.
You wait till age 30 to invest that $5,000, the amount will increase to $54,000 at age 65.
A delay of 10+ years can cost you over $60,000.
This is one reason why investing early isn't simply a smart move, it's the most crucial choice for gaining wealth.
The younger you invest, the more (Calculated) Risks
Younger individuals are more likely to bounce back from downturns in the market. This makes it possible to invest in more aggressive options like stocks, that offer more potential returns in the long run compared to savings or bonds.
As you age and move closer to retirement, you can gradually move your portfolio towards safer investments. However, early on is your chance to grow your wealth with riskier strategy, which is also higher return.
Being early can give you the ability to make investments with more flexibility. You can afford to make a mistake and two but learn from it and still be ahead.
The psychological benefits of starting Early
The early start builds more than just financial capital. It builds trust and respect.
If you start to make a habit of investing during the 20s and 30s, you:
Learn about the fluctuations and ups on the stock market.
Be more financially informed.
Gain peace of mind by watching your wealth grow.
Do not be afraid of not being able to catch up later in life.
You can also use your later years to enjoy your life rather than rushing to save.
Real-Life Example: Sarah vs. Mike
Let's consider comparing two fictional investors to highlight the fact.
Sarah begins investing $300 a month when she was 22. She then stops when she is 32--just 10 years of investing. Sarah never adds a dollar.
Mike waits until he is 32 years old and invests $300 per month until 65, a total of 33 years.
At 8% average return:
Sarah's investment $36,000 increases in value to $579,000 at age 65.
Mike's investment $118,800 grows into $533,000 at the age of 65.
Sarah was able to contribute only a third as much money but did end up with more money simply due to her early start.
How to Begin Investing Early Step-by-Step
If you're certain it's time to start, here's a easy-to-follow guide for getting started on the right foot with early investment:
1. Begin with a Budget
Find out how much money you can comfortably spend each month. As little as $50-$100 is an excellent start.
2. Set Financial Goals
Are you investing in retirement? A home? Financial freedom? Specific goals guide your plan.
3. Open an Investment Account
Begin by opening an IRA, Roth IRA, or a taxable brokerage account. A lot of platforms do not have minimal requirements and can be automated in investing.
4. Choose Index Funds with Low Costs or ETFs
Instead of picking stocks individually consider investing in diversified funds which mirror the market. They're cost-effective and have high long-term return.
5. Automate Your Investments
Make recurring monthly contributions to ensure you're always consistent. Automating your contributions reduces the temptation to just time the market or stop investing.
6. Reduce High Fees
Select accounts and money with low ratios of expenses. Costs of high fees can reduce your profits significantly over time.
7. Stay on the Course
Investment is a lengthy game. Avoid the noise of the market and focus on your long-term goals.
Common Excuses, and Why They're a Cost
Here are a few reasons why people aren't investing enough, and the reasons why delays can cost you money:
"I'll begin as soon as I earn more money."
Even small amounts of money add up over time. Waiting just means less time for growth.
"I have the burden of debt."
If the interest rate you pay on debt is less than your expected investment return It is often logical to make both payments: pay down loans and invest.
"I do not have enough."
You don't need for a degree to become an professional. Begin with index funds and take your time learning as you progress.
"The market is too risky."
The longer your investment horizon is, the more time you'll have to ride out the ups and downs.
The Long-Term Perspective The Long-Term View: Generational Wealth
Early investment doesn't just help your. It can also impact your family for generations to come.
The foundation of a solid financial base early will allow you to:
Find a home.
Make sure you fund your child's schooling.
Retire comfortably.
Leave a financial legacy.
The earlier you begin and the earlier you start, the more you'll be able to give, and the more financially sound you will be.
Final Thoughts
An early start can be the closest to a financial superpower almost everyone has access. There is no need for a six-figure income or a financial degree or perfect timing to build wealth. You just need time to be consistent, and a sense of discipline.
If you start early, even with small amounts, you're giving your money the time needed to grow into something powerful. The biggest error isn't in choosing the wrong option or missing out on an exciting stock. It's not starting at the right time.
Begin today. The future you will be grateful to you.