Investing is one of those things that a lot of people know they probably should be doing, but for one reason or another it keeps getting put off.
Some people feel like they don’t have enough money to get started. Some people feel like they don’t know enough about investing and are either overwhelmed by the choices or are worried about making a mistake.
And some people haven’t started because, well, there are always a million other things to do to and investing just hasn’t felt urgent enough yet.
Those are all understandable reasons, but investing is too important to let it linger on the sidelines.
Investing is one of the most powerful tools you have in your financial arsenal, and in this post I’m going to talk about the two biggest reasons you should start investing now, no matter how much money you have or how much you know about it.
The first reason is one you’ll hear a lot. The second reason is one you might not have heard anywhere else.
Reason #1: Math
Let’s say you invest $100 and earn a 10% return. After one year you will have $110 in your account. Pretty cool!
Now let’s say that you earn another 10% return the next year. This is where math really starts working in your favor, because you get that return on NOT ONLY the $100 you invested, but ALSO on the $10 you earned the year before.
So instead of earning $10 like last year, this year you earn $11. That puts your total account value at $121.
Even if you never invest any money ever again, the amount you earn will continue to increase. (Though it’s important to remember that the stock market does not always go up, so in some years you will see a negative return.)
This is the magic of compound interest. And the earlier you start investing, the more time you give compound interest to work it’s magic.
Which means that by starting to invest now instead of later:
- You can actually save less money and still hit your savings target, since that compound interest will be doing its thing, AND
- You will be able to reach your goals sooner
To show you how this works, let’s create a fictional person named Brian. Brian is 30 and hasn’t started investing yet. But he’s run the numbers and has decided that he needs $1 million to be financially independent and that he wants to get there by age 65.
How much does Brian need to save in order to reach his goal? The answer depends on when he starts:
The sooner he starts the less he actually has to save. And if he starts early AND decides to save more, that simply means he’ll reach his goal sooner.
Reason #2: Habit
The math is important, but what if you can’t save enough right now to make it all that meaningful? What if instead of saving $436 per month like in the example above, you can only afford to save $200 per month? Or maybe only $25 or $50 per month?
At that rate, does compound interest actually matter? Is it really all that important to start now when the results are small?
Yes. It is.
Because no matter how much you’re saving, by starting now you’ll build the HABIT of investing. And more than anything else, it’s the consistent habit of investing that will get you to financial independence.
You’ll build the habit of saving, learning how to automate your savings and getting used to the idea of some of your money being set aside for the future each month.
You’ll build the habit of making investment decisions, deciding which accounts to use and which funds to pick and how to navigate all the strange logistics and terminology.
You’ll build the habit of sticking to your investment plan, even when everyone around you is bailing on theirs, which is the real key to long-term success.
These are the habits that form the foundation of a successful investment plan. The sooner you start building them, the stronger they’ll become, and the easier it will be to reach your most important personal goals.
Are you ready to start investing?
“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb
No matter what your financial situation looks like, how much money you have, or how much you feel like you know about it, it’s probably a good idea to start investing.
It could be as simple as putting money into a savings account. Or asking your HR rep how to start contributing to your 401(k). It doesn’t have to be all that complicated.
But the money you save today will be worth a whole lot more years down the line. And the habits you build today will serve you for the rest of your life.
So, are you ready to start investing? What’s the next step you can take to move forward?