You appear to be asking whether you should invest more money now and less when you’re older. The answer is yes, and here, we’ll dig into the reason why it makes sense to put money away sooner rather than later.
Compound interest
The sooner you begin investing, the more time your money has to grow. Compound interest is not only paid on your principal but also on the interest you’ve accumulated. Like a snowball, every time it rolls over, it gets a little bit bigger.
To give you an idea of how important it is to take advantage of compound interest early, let’s look at what would happen if you invested $10,000 at five different ages. In this scenario, we’ll assume you earn an average annual return of 7% and plan to begin making withdrawals at age 67.
|
If you invested $10,000 at this age… |
It could be worth this much at age 67… |
|
25 |
$171,443 |
|
30 |
$122,236 |
|
40 |
$62,139 |
|
50 |
$31,588 |
|
60 |
$16,058 |
Lower entry cost
Imagine that you’ve always admired the Acme Brick Company. You like how steady leadership has been and how well the company has weathered economic downturns. If you’d purchased stock when you were 25, you could have gotten it for $25 a share. Now, 10 years later, it’s $70 a share.
If you find a company you believe in, you don’t want to wait until the cost of buying in becomes too high.
Market volatility
Simply put, the earlier you enter the market, the longer you have to weather market fluctuations. According to The Hartford Funds, if you were to invest for 50 years, you’d probably experience somewhere around 14 bear markets. In other words, market downturns come and they go.
However, the more time you have, the more time all those great deals you scooped into your portfolio while the market was down have to become more valuable.
Financial discipline
No rule says you can’t learn to be a disciplined investor at age 55 (you can learn to be a disciplined investor at any age). However, committing early to regular investing can help you develop the financial habits you need to carry you through life with a mindset focused on savings and growth.
A GPS for life
As you invest, it’s natural to have a good idea of why you’re investing. You may have a short-term goal, like paying off student loans. It may be a mid-term goal, like having enough money for a down payment on a house. Your long-term goals may include funding a comfortable retirement, helping your grandchildren with the cost of college, traveling the world, starting a small business, or pursuing some other goal that perfectly aligns with who you are.
The beauty of starting early is that you can begin to seriously plan for how that money is going to be spent while you’re still relatively young. It’s like an early roadmap of the life you want to lead.
Considerations before getting started
There are a several important things to consider before you begin your investment journey:
- Jettison high-interest debt: If you have high-interest debt, it makes little sense to invest rather than get rid of that debt. Let’s say you’re carrying a balance on two credit cards, each with an interest rate of 24%. It’s possible to do two things at once: Work hard to pay off existing debt while also planning the investment strategy you’re going to utilize once you can begin investing in earnest.
- Check your emergency fund: Sure, it’s easy to pull out a credit card to pay for a souvenir when you’re on vacation or to take someone special on a date. However, it may be necessary to pay by credit card if your transmission dies and you need car repair but you don’t have an emergency savings account. What you don’t want is to feel like you must pay by credit card. By building an emergency fund (ideally, with enough money in it to cover three to six months’ worth of bills), you don’t have to worry about ever needing to use high-interest credit.
- Fill any knowledge gaps: No one is born knowing everything there is to know about investing (so if you don’t, you’re in excellent company). The earlier you begin investing, the more time you have to learn the ins and outs that can help you build wealth.
- Understand market conditions: Starting early also means having more time to learn about current market conditions and economic factors that ultimately impact your portfolio. Investors don’t learn nuances overnight. It’s a gradual process, aided by the amount of experience you gain.
In short, when given the choice between investing now or waiting until later, the answer is nearly always “Now’s the ideal time.”
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