Investing isn’t on the top priority list of many young people.
That makes sense to a certain extent since entry-level salaries are typically nothing to write home about. Plus, let’s not forget that at this stage of life, most people start thinking about buying their first home, starting a family, and doing everything else that’s part of adulting. In other words, some big-ticket purchases and investments lie ahead of you.
However, as counterintuitive as it seems, the earlier you start putting some money away into an investment fund will help you achieve these important life goals faster.
Here are the five top reasons why you should start investing early.
1. Make the Most of Compounding
If you start building your investment portfolio while you’re young, you’ll be able to reap the benefits of compounding.
The logic behind this approach is relatively straightforward — reinvesting what you earn from interest. So, this process is referred to as interest on interest, allowing you to invest less and still end up with a projected egg nest.
The snowball effect of compounding is best leveraged if you start investing in your twenties. For example, investing $10,000 with a 5% annual interest will add up to $10,500 at the end of the first year. However, this sum will grow during year two to $11,025, thanks to earning interest both on your principal and interest. Finally, after ten years, you’ll be looking at $16,288.95 on the condition you don’t withdraw anything from your account.
So, your principal will increase by more than 60% within a decade without you having to add any more money. Now, imagine what would happen if you actually contributed $100 every month.
2. Taking Risks
Opting for blue-chip stocks can be a great idea if you want to play it safe.
But, when you’re young, it’s easier to take risks since your whole life is in front of you. Even if you make a mistake, it won’t have a profound effect on your long-term success.
Let’s say you want to retire at 65. If you start building your investment portfolio when you’re 25, your time horizon, or the expected time before you plan to use the money you’ve been investing and saving, is 40 years. The fact that you won’t need that money for such a long time gives you more room for maneuver.
Also, you’ll have more opportunities to make up for potential losses.
This allows you to engage in riskier ventures like equities that can yield high returns, while you don’t have such a luxury when you’re 55.
In addition, the freedom to make mistakes comes with a valuable perk — you’ll learn your lessons early without jeopardizing your portfolio. Bouncing back will be much easier when you don’t have to think about your upcoming retirement or your kids’ college tuition.
3. Smooth Out Market Volatility
We don’t know what the future brings, but what we can be sure of is that financial markets will have their ups and downs. But, this volatility is a problem only for short-term investments. If you’re going for the long haul, you can expect that these ups and downs will even out and that your investment will grow.
The Dow Jones plummeted by more than 50% within 1.5 years before it started recovering and reached its pre-recession levels five years later. The portfolios of investors about to retire during that period were heavily affected, and some had to postpone retirement plans if their savings were tied up in the stock market.
On the other hand, younger investors suffered significantly less impact since they had more time before needing their retirement savings.
4. Improve Your Spending Habits
Investing will also help you improve your spending habits.
Once you start building your portfolio, your perspective on money and saving will change for the better. First of all, to be able to invest, you can’t spend recklessly and without planning. And once you see your assets accumulating, it will give you extra motivation to be even more careful with your spending and save for bigger and more important things.
By learning how to optimize your expenses and live below your means, you’ll have an opportunity to set up an emergency fund and avoid getting into debt.
5. Retire Earlier
The sooner you start investing, the sooner you’ll reach your retirement savings goal.
So, if you don’t want to work well into your 60s or even 70s and still be able to live comfortably after you stop working, you need to start socking money away while you’re still young.
Thanks to compounding, it will be possible to hit your retirement savings goals even before you turn 50, giving you the financial privilege to quit and pursue other passions.
Final Thoughts
You can start investing even with little money, so don’t let a modest salary prevent you from getting involved in this lucrative activity. Also, you don’t have to be a financial whiz to build a decent portfolio and secure your and your family’s future. Once you see you’ve accumulated interest, your focus will shift from spending on flashy gadgets, trendy clothes, and dining out to making your money work for you.
