When it comes to investing, it’s common for many people to put it off until later in life. However, starting early is crucial for long-term financial success. Here are three reasons why investing early is so important.
Taking on More Risk in Your Portfolio
Investing in stocks can be risky, but it’s necessary if you want to see big returns on your investments. By starting early, you have a longer investment window, which allows you to be more comfortable taking on more risk. Investors who are too conservative with their investments may limit their risk, but they may also limit their potential returns in the process. This exposes them to the danger of insufficient income during their retirement.
Enjoying Compounded Growth Without Much Effort
The longer your money is invested, the more you can benefit from compounded returns in your brokerage account or IRA. Compounded returns refer to being able to earn a return on both your principal contributions and the returns they generate. For example, if you invest $1,000 at the start of the year and it grows to $1,100 by the end of the year, you’ll get to invest $1,100 in the second year, not just your initial $1,000.
By investing $100 a month over a 40-year period at an average annual 8% return, you would end up with approximately $311,000 when you account for compounded returns. That’s why financial guru Ramit Sethi suggests starting early in his tweet that reads, “At a certain point, your investments make more than you can spend. Start early.”
Developing Good Habits
Carving out money for your brokerage account or IRA at a young age takes a degree of sacrifice, but it’s worth it. Learning to prioritize your savings and investments is an excellent habit to develop because it can help you avoid overspending and landing in debt. By consistently funding your investment account, you’re not spending all of your paycheck, and that alone has a lot of value.
Investing from a Young Age: A Real-Life Example
If you’re still not convinced about the benefits of investing early, let’s look at a real-life example. Meet Mary. She’s 22 years old and is starting her first job out of college. She decides to invest $200 a month in a brokerage account that earns an average annual return of 8% until she turns 65 years old. By the time Mary retires, she would have invested $107,200, but her account would have grown to $810,914 thanks to compounded returns.
Now, let’s compare Mary’s results to someone who starts investing when they’re 32 years old. By investing the same amount each month until they turn 65 years old, they would have invested $93,600, but their account would have only grown to $460,899. As you can see, investing early can make a big difference in the long run.
Investing early may seem daunting or unnecessary, but it’s essential for long-term financial security. By taking on more risk in your portfolio, enjoying compounded growth, and developing good savings habits, you’re setting yourself up for a successful financial future. It’s never too early to start investing, and the benefits are worth the effort.
