When should you start investing?
Have you ever thought that you’d like your money to work for you rather than always having to work for more money?
Have you wanted to start investing, but aren’t sure if it’s the “right” time?
Is the market too high? What if you time it “wrong”?
These are questions that a LOT of people have.
You work hard for your money, so obviously you don’t want to make a bad investment and lose any of it.
So when should you start investing?
The simple answer is today.
Or even better, yesterday. Or last month. Or two years ago…
But as we can’t go back in time and change it, the best option is now. Today.
Why is today the perfect time to start?
How can I even say that TODAY — whatever day you might be reading this — is the PERFECT day to start?
I can — and do — say that because of the power of compound interest and how it works in your favor the longer you have to let your investment grow.
If you take a look at the historical data for the S&P 500 (an average of 500 of the top companies in the US), the average return has been around 10% each year (+/-, depending on which search you use).
Now that is not to say that EVERY single year has had a 10% return. There have definitely been negative years. (Worried that your investment will go down because you have the worst timing EVER? We’ve got another blog that discussed that!) BUT, if you take the average for any 10 year period, the average is a 10% return per year.
So let’s get nerdy for a minute and take a good look at the numbers:
Example 1:
You start investing when you’re young (age 25)
You start with a $10,000 investment and add $250 each month.
We’ll be conservative and use an 8.5% return (less than the 10% average)
After 30 years, when you are now 55, you have just over half a million dollars. From your total investment of $90k. Not too bad at all! You’ve more than 5x’d your money and have a very cool half million to show for it.
Notice the green part of the bars here — these represents the money that you have earned from your investment. By the end of 30 years, those green bars are substantially larger than the yellow bars, which represent the money you have put in.
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Example 2:
You are more of a late-bloomer and don’t start investing until you’re 40 years old.
You start with the same $10k and you’d like to reach the same $500k by the time that you’re 55, using the same 8.5% return. Because you have only half of the time to enjoy compound interest, instead of investing $250, or even doubling it to $500, you have to invest $1350 each month!
Yikes! Finding $250 each month to invest doesn’t take a ton of effort, but trying to come up with $1350 each and every month requires a LOT more work.
Can it be done?
Absolutely it can. But your return is much different. In this example, you contribute $243k to end up with $500k. While you’ve doubled your money, it’s not exactly the 5x return from the first example!
Notice how the size of the green and the yellow parts of the bars are about equal? This is because you’ve only been able to capitolize on the power of comound interest for half the time of the previous example.
If you take a look at those same numbers and increase your rate of return to 10%, then in the first example, you net a very nice $680k for your effort.
Try to make the same amount with only half the time? You would now have to invest $1650 each month. Ouch!
So regardless of the rate of return you use to calculate your numbers, and even if you end up starting at a high point in the market, the power of the compound interest is in your favor and you end up winning in the long run.
However, investing as soon as possible is the simple answer and if you want the best chance of success in making your money work for you, you need to have some things properly set up before you invest. Check back soon for a new blog detailing what steps you need to take BEFORE investing.
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