If I could turn back time, you know the first thing I’d do? Start investing at a young age.
I’m serious. Knowing how investing and compound interest work is such a huge game-changer for your finances. I graduated with a somewhat “reasonable” amount of student loan debt and I somehow knew I needed to pay that back quickly.
But fresh out of college, I didn’t bother to learn how to invest, and that hurt my financial future more than I could have imagined.
Looking back at the end of another year makes me introspective, and since I can’t actually go back in time to my first job and hit the ground running with investments, I figure I can at least share a bit of what I’ve learned.
This post was written by our staff writer, Kate Underwood. Enjoy!
Investing at a Young Age Is About Time
The primary reason to start investing at a young age is to give yourself as much time as possible for your money to grow. Compound interest is an absolutely amazing phenomenon, and I wish I’d grasped that as a new working professional.
When I began teaching, I looked at the salary I received in one of the lowest-paying districts in the state. I knew I could pay off my student debt, but didn’t think investing in retirement was for me.
I didn’t understand how investing worked, and I didn’t seek out anyone who did to gain that knowledge. Since I didn’t make much money, I didn’t realize investing even small amounts regularly would make a big impact on me in my forties and beyond.
As Suze Orman has said, “The key isn’t the amount, the key is the time.”
Investing at a Young Age for the Compound Interest
The primary reason personal finance experts recommend people start investing at a young age is compound interest.
Even if you don’t have a lot to spare, it’s worth it to start investing young because every dollar will earn a rate of return, and as time goes by, you’ll continue reinvesting to earn even more in interest.
Here are a couple of examples to show you how investing early benefits you. These assume an annual rate of return of 7%.
Here’s how investments can grow over time:
- $200 invested per month from age 25 to 65 = $551,000 total value
- $200 invested per month from age 35 to 65 = $262,000 total value
- And, $200 invested per month from age 45 to 65 = $115,000 total value
Notice that not only are the investments worth much more by age 65 for the investor starting at age 25. In addition, the 25-year-old starter only has to invest $48K more than the 45-year-old (double). But their investment grows to be worth more than $400K above the 45-year-old’s.
- $200 invested per month from ages 25 to 35 (10 years total, or $24,000). This would grow to about $300,000 by age 65 (without adding another cent after age 35).
- $200 invested per month from ages 35 to 65 (30 years total, or $72,000). This would grow to only $245,000, and that person actually contributed more.
Compounding interest can be an amazing thing, right?
Investing at a Young Age for the Experience
With all things financial, there’s really no substitute for actual experience. I mean, you can run all the numbers through compounding calculators, but if it’s not attached to real money, it doesn’t mean as much.
When you start investing as soon as possible, you give yourself the gift of investing experience. You learn what to do and what not to do.
It can actually work in your favor if you don’t have a lot to invest when just starting out. You can get your 401(k) or Roth IRA set up, contribute $50 a month or whatever you can scrounge up, and it’s not a ton of money to lose.
Starting the process of investing at a young age (in your 20s or even sooner) lets you make mistakes. You learn from every misstep, and in the beginning, you aren’t risking as much money. So you get to make $100 and $1,000 mistakes instead of $50K or $500K mistakes!
Even if you lose money, you carry the lesson forward with you throughout your life. When you’re 25 and make an investing error, you have multiple decades to recover. You don’t have that kind of leeway if you wait until you’re 40 or 50 to invest.
Related: 6 Common Financial Mistakes to Avoid
Get in the Habit of Investing at a Young Age
Investing young is a great strategy because the earlier you begin, the easier it is to build a lifelong habit.
If you don’t start investing at a young age, you might be tempted to overspend on luxury items. Doing that too often right out of college might just cause you to start thinking you “need” those high-priced possessions.
It’s harder to cut back on the fun stuff once you’re used to it.
But by investing as soon as you start full-time work, you can immediately start the habit of living on less than you make. Whether you start by investing $25 a month or $500 a month, the benefit of this habit will be worth it.
Your mindset will be shaped by the fact that you’re making the effort to sacrifice now for a payoff later. You can increase contributions by a few percent at a time as you have more money to spare.
Don’t Forget About Emergencies and Debt
Of course, when you’re starting to invest at a young age, you may not have a ton of money set aside. Be sure to save a decent emergency fund before you get too “invested” (pun intended) in retirement.
And you might be paying off debt as well. If you can focus fiercely on debt payoff for a relatively short period of time (like 2 years, not 10), it might make sense to put off investing until that’s done.
But you can also start investing as soon as possible, just at very low amounts, even while in debt repayment, and increase monthly investments as you reduce debt.
Check out this printable debt payoff chart to help you get organized and motivated!
Investing at a Young Age: Start As Soon As Possible
The core thing to know is that investing is going to pay off bigger rewards the younger you begin. Do yourself a favor and don’t procrastinate like I did. Start saving in a Roth IRA, 401(k), or similar investment account as soon as you can.
Investing early and with regularity is one of the best decisions you can make to secure your financial future.
Are you ready to start investing at a young age? I sure hope so!!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.