Investing can seem intimidating to a lot of people, but it doesn’t have to be. Believe it or not, you can start investing with little money, and over time your investments can grow to a substantial amount of money. In fact, if you invest early enough in your life the impact of compounding interest starts working for you very quickly.
The earlier you start investing the more money you will have when you retire. But why should someone invest? There are many good reasons to start investing at a young age, and I’m going to list six of them below.
Now before I get into these points let’s make sure everyone knows what investing is. Investing is putting your money into a place where it will gain value over time. For example, you can invest in stocks (which is essentially owning small pieces of companies), real estate (or buying property and renting it out), or bonds (which is loaning money to an organization, like the government). Different investments go up and down in ‘value’ at different times, but over the long term, as people continue to use and need those products you are investing in, your investment will rise in value.
1) The power of compound interest
When you invest your money, understand that over time your money is making more money. This concept is known as compound interest. According to this concept, let’s say you deposit $1000 into an investment account when you are 18 years old and allow it to sit at a 4% yield for 40 years. This means that in 40 years your $1,000 will become $12,038.46 at the end of the 40 years (assuming all of the interest is left to compound).
Now, let’s say that you wait until age 30 to invest your first $1,000. Assuming all else being equal if you had waited until age 30 to start learning all about investing your money the same way as the person who started at 18 years old you would only end up with around $5,732.15 at the end of 40 years (assuming all of the interest is left to compound). The reason for this large discrepancy in earning power is that you are missing out on all of those extra years that your money could have been compounding interest.
2) You’ll Form Better Financial Habits
Most wealthy people are rich because they were able to form good habits when they were young. If you develop smart investing habits while you’re still young, there’s a higher chance that you will continue those good habits all through your life.
And if you want all of your investments to work for you, all you need to do is continue adding to your investments all through your life. This way, all of the money that you invest will go into assets that appreciate over time.
3) Leads To Financial Freedom
Many people do not get into investing until they are all grown up, but if you start young enough, you have a lot of time on your side. The earlier you start investing, the more the power of compound interest will work for you and your investments.
If you invest all your money and earn a solid 10% on it each year until you retire at 65, then all that returns get reinvested which means that by the time you retire, all of those returns also get reinvested. The original amount gets larger and larger as all that returns get reinvested, which means that all those returns have to be a lot higher since the money is now worth more.
4) Increases Risk Tolerance
Risk tolerance is a psychological trait that refers to how willing a person is to take risks. Someone with a low-risk tolerance would prefer to play it safe and avoid any risky behavior, while someone with high-risk tolerance can handle taking on more dangerous or daring activities.
Studies show that the younger an investor starts off investing, the higher their risk tolerance will become. This is because someone who starts investing at a young age has more time to recover financially from any bad investments, which results in them having a higher risk tolerance.
5) Increases Investment Returns
Though there are no guarantees that everyone who invests early will have high returns, studies show the odds are in the favor of early investors.
Early investment returns are a product of compounding interest over time, meaning that their contributions increase exponentially as time goes on. Just by investing $1,000 a year for 40 years at a 6% annual return will grow to $80,282 in your portfolio before all your contributions are removed. On the other hand, if you wait ten years to begin investing, all your contributions will only grow to $41,839.
6) Early Retirement
It is a common misconception that investing in stocks is something that you can do when you have all the time in the world. Many people think that they should only save for retirement when they are old, and by then it would be too late to make all of their money back.
In reality, if someone starts saving for retirement at age 20, they would most likely be able to retire at age 40. If you start young enough, investing can be a great way for your money to make more money for you, meaning that even without putting too much effort into it on your end, you’ll still be able to retire early and live a wealthy life.
In order for this to work, however, you have to make sure that you save your money from the get-go and invest it right away because time is not on your side and eventually you will lose all of your youthful energy and ability to earn easy income.