The Incredible Power of Investing Early: Start in your 20s & 30s

You’ve probably heard this a thousand times - If you aren’t investing yet, you should start soon. What most people don’t realize is that to become financially independent you don't need to be an expert in personal finance or earn a big fat salary or know about this year’s hottest stock tip. It all comes down to one thing: investing.

The earlier you start investing, the bigger the payoff.

One sure-fire way of building up a portfolio is to make investing a habit - a little chunk here, a little chunk there. The amount may seem small at first, but if you are persistent and invest over a long period of time, these little chunks will add up to a sizeable amount. With the power of compounding, you will start to see your savings grow exponentially.

We all know the importance of savings and investments for our future, yet most of us fail to start saving in the early stages of our professional lives. Our 20s and 30s are one of the most crucial decades in our financial life, yet that’s when we are more engrossed in paying bills, spending money on movies, fancy restaurants, globetrotting or buying the latest mobile phones. Investments don’t even make it to the list of top priorities. However, it’s these decades that can make or break your ability to retire well, pay off your mortgage before you turn 60 or secure your future kids’ education. In fact, many people think they have very little investible surplus, so they don’t even bother starting.

When you are young, you have the advantage to grow your investments over time and make them work for you. If you’re already investing your hard earned dollars, that’s great! If you aren’t, that’s alright. I simply want to help you understand the five main reasons why you should start investing as early as possible:

#1. Unleash the magic of compound interest

Albert Einstein is believed to have said that “Compound interest is the most powerful force in the universe.” He called it “the eighth wonder of the world” and “the greatest mathematical discovery of all time." Compound interest is simply defined as interest being earned on interest. It can transform a small amount of money into a high-powered, income-generating machine.

The two key ingredients for compounding to be effective are the reinvestment of earnings and time.

Savvy investors understand that the longer money is put to work, the more wealth it will generate in the future. That’s why the magic of compounding works best the younger you are when you start. To illustrate the power of compounding, bestselling author, Ramit Sethi, created a simple yet powerful visual (below) in his book, I Will Teach You to be Rich.

The illustration compares the investing strategies of two friends: Smart Sally and Dumb Dan. Both invested $100 per month, but while Dan invested for 30 years, Sally invested for only 10 years. Despite the fact that Dan invested for a much longer period, Sally’s final savings was a staggering $50,000 higher than him. This was only possible since Sally started investing earlier than Dan and benefited from compound interest.

#2. The precious gift of time

Investing should be a long-term game. In general, the younger you are, the more able and willing you are to take risks on your investments. This is because you have many productive earning years ahead of you to grow your wealth and recover from market corrections. A longer investment period enables the good years in the market to balance out the bad ones, helping market returns reach closer to their long-term averages.

On the other hand, those approaching retirement will be inclined toward less risky and more stable investments. Those with a shorter time horizon, may also have the tendency to cash out too early, or panic and sell during market drops. By doing so, they run the risk of not being invested in markets, thus also missing out on strong market rallies when they happen.

Investment returns become incredibly powerful when they compound over long periods of time. Therefore, by starting early and giving your investments the longest time possible to compound, you can significantly improve their overall performance.

#3. The enormous power of the financial markets

One of the greatest benefits of investing early is that you can harness the enormous power of the financial markets for a longer period of time. Over the last century, the stock market’s average return is about 10% annually. That’s what long term investors can expect to earn if they buy and hold their stock investments over time. However, keep in mind that the 10% is the “headline” rate - you will lose purchasing power of 2% to 3% each year, due to inflation. That makes the average return to be about 7% to 8% annually.

Wharton’s Jeremy Siegel analyzed the historical performance of several types of investments in his book, Stocks for the Long Run. His research declared that from 1926 to 2006, stocks produced an average real return of 6.8% every year. While bonds are a more stable asset class, they generate an average of 2.4% annually post inflation. So in the long run, despite all its ups and downs, stock market returns are surprisingly consistent. However, the exact opposite is true over shorter intervals.

If you are not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes -Warren Buffett

The stock market has been a steady moneymaker for long-term investors, but it can be very challenging to predict how it will perform in a specific year. In fact, you should expect sudden or sharp price movements in any given year. That’s why many experts suggest to not invest in stocks with any money you may need within the next five years or more. So when deciding how to put your money to work, remember that stocks are a long-term investment.

#4. Dollar cost averaging

It can be very stressful to follow the ups and downs of the stock market, especially if you watch the price of your investments daily. It’s so easy to wonder “what if” you’d snapped up a stock just before its value skyrocketed or right after that sharp drop.

We all just love to pick the tops and bottoms for any stock, timing it to perfection. But in reality, timing the market is very difficult.

Early birds can help smoothen this by investing early and regularly. With this technique, you could get better returns on your overall portfolio than with your individual portfolio investments. But how is this possible? With dollar-cost averaging, you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. By doing so, you purchase more shares when prices are low and fewer shares when prices are high.

In other words, dollar cost averaging is when you decide how much money you are going to invest each month and then invest it into the stock market each and every month no matter what. You keep the faith and keep going with your plan, regardless of the prevalent market conditions. This way you take advantage of both the highs and the lows - that’s the beauty of it.

#5. Learning from experience

You can always learn about investing from books, magazines or the internet. But the best learning comes through experience. Better investing doesn’t happen by accident - good investors work at it consistently through the years.

Starting your investment journey when you are younger gives you a huge advantage because you have many years to study & understand the markets. You can experiment and learn from your previous investment strategies and then gradually fine tune your investment style to avoid pitfalls as time goes by. The experience gained from investing early will play a large part in your future investment success.

“When” you start investing could make a bigger difference than “how much” you actually invest over time.

Investing at any age isn’t easy, but waiting to invest for when it’s convenient isn’t the best approach either as there will never be a perfect time to start. You don’t need to wait for that large lump sum or that perfect timing in the markets to take the plunge. Start as early as you can, with an amount you can afford, even if it’s just $100, and then build it up gradually. The sooner you put your dollars to work, the more likely you are to benefit in the long term. Putting it off could actually cost you more than you realize.

Got any questions or interesting tips from your own investment journey? Do let me know in the comments.

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Disclaimer: The views and opinions expressed in this article are my own. It doesn't represent the official policy or position of any other organization, employer or company.

Photo Credits :-

Cover image <a >People photo created by lifeforstock - www.freepik.com</a>

https://www.myfrugalbusiness.com/2018/04/suze-orman-quotes-finance.html (Michael J. Schiemer)

Power of compounding illustration, created by author, Ramit Sethi, in his book, I Will Teach You to be Rich.

https://twitter.com/dave_ulrich/status/808423877172989952

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