5 Reasons Why Investing Earlier Makes a Big Difference in 6 Year
Not sure when to start investing? Quick answer: the sooner the better.
Conflicting priorities may make it hard to think about investing when young. For example, over one-third of members of Generation Z born between 1997 and 2002 have student loan debt.1 On average, millennials owe about $4,930 on credit cards.2
Debts like these can put investing on the back burner. But if you can find the means and the budget flexibility to start, it may be worth it in the long run.
“Investing young, even if it’s just a small percentage of your income, does two things,” says Heather Winston, director of individual solutions at Principal®. “First, it establishes good savings habits that will apply universally, regardless of what your savings goals are. Second, the sooner you start, the longer your money has to grow over time.”
Need more reasons to start investing young? Here are five.
1. Saving a small amount when you’re young gives you the benefit of time.
Ever heard the phrase, “It’s time in the market, not timing the market, that matters”? This adage refers to two things: 1) Historically, over long periods, markets have grown, and 2) the earlier you invest, the more compounding interest works to your advantage.
Although the markets go through plenty of ups and downs each year, the trajectory is generally up over time. Take the S&P 500: From 1980 to 2021, its average rate of return, adjusted for inflation, was over 10%.3
Time also benefits compounding interest, which is when investment growth in the form of dividends and/or capital gains is in turn reinvested. That repeats too, earning you more interest over time.
2. Investing when you’re young, your money growing faster than just saving in a bank account alone.
Let’s say you put money in a traditional savings account, and, at the same time, put the same total in an investment account. Given average growth assumptions and the benefit of compound interest, the difference between the two adds up quite a bit over time.
Example: $100 per month with 6% return
This example is for illustrative purposes only.
3. Even if you stop saving, your money grows more if you start investing young.
The reality for most people is that financial priorities shift over time, so your ability to invest may shift too. For example, if you’re able to start investing young, but then stop (and aren’t able to start again) that initial savings pay more benefit than if you wait to start until you’re older but save longer.
Graph Investing young and stopping (saver 1) vs. investing later in life (saver 2)
4. Saving for longer may help cushion the blow of inflation.
The reality for most people is that financial priorities shift over time, so your ability to invest may shift too. For example, if you’re able to start investing young, but then stop (and aren’t able to start again) that initial savings pay more benefit than if you wait to start until you’re older but save longer.
At a historically average 3% inflation rate, the value of a dollar you save today will be cut in half in 24 years.
5. Investing when you’re young may equal a higher risk tolerance and, in turn, higher returns.
For most young investors, traditional retirement is far in the future, with an uncertain timeframe. The upside? You may be more tolerant to risk in your younger years. If the market becomes volatile and your investments lose some value, they’ll likely have time to recover.
Also Read : Pros and Cons Early Investment
It may help to think about your goals in terms of time—short-term is a couple of years or less, medium-term is five to 10 years, and long-term is 10 plus years. “Envision what you want your future life to look like and what you’re willing to do to attain that,” Winston says. “Life will bring twists and turns and those events will change how you prioritize your goals along the way. It is common to make tradeoffs over long-term goals. Keep your goals simple to create consistent behaviors and positive habits—and ultimately control the amount you save as you go.”
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