Some people think they should start investing once they are married and have kids, others believe the best time is to start after you finish school. Perhaps you think that the best time to start investing is all of the above and only after you pay off debt.
The truth is, there is never just one answer that applies to everyone, because priorities are different for every scenario. In short, the earlier the better. With that said, I've compiled a few examples to show you how investing starting at different ages can affect your overall wealth. Lastly, i'll show you a few things to keep in mind before you start investing in stocks.
“When should I start investing?” – read this and the answer suddenly becomes obvious.
At What Age Should You Start Investing?
Lets just say that time is your best friend when it comes to investing in the stock market. Why? The more time you have to invest, the more time that compound interest has to exponentially grow your portfolio.
Compound interest is when your investment portfolio receives interest rates of return upon previous interest rates of return.
For example, let's say that on year one, your investment portfolio starts with a balance of $10,000. It receives a 10% rate of return after year one, or a return of $1,000. Your total balance is now $11,000.
In year two, let's say you once again earn a 10% rate of return on your investments. Your 10% return is based on a larger balance, so your return in year two is now $1,100 instead of $1,000.
This is why keeping a long term investment mindset is so important.
So, at what age should you start investing? Again, the answer is AS EARLY AS POSSIBLE!
Consider the following examples to illustrate the importance of investing earlier rather than later.
Example #1: Angie Started Investing At Age 35
Angie is a sales manager for a growing software company, and graduated with her bachelors degree at age 25 in management. She didn't decide to start investing until age 35 after she's married with one child.
Angie decides to invest $1,000 per month (double of what David is investing) into the S&P 500 index using an ETF fund. Her average rate of return is also 10% annually.
What is Angie's total balance at age 65 when she plans to retire? Her total balance at age 65 is $2,260,487.93. She contributed a total of $360,000 total ($1,000 x 360 months (30 years) = $360,000). The rest was growth from compound interest.
Example #2: David Started Investing At Age 25
David is age 25 and just finished his bachelor's degree in college. He just got hired on by his first full time job after receiving his degree, and decides to invest $500 per month into the S&P 500 index using an exchange traded fund (ETF). He averages 10% rate of return on average each year.
What is David's total balance at age 65 when he plans to retire? His total balance at age 65 is $3,162,039.79. He contributed only $240,000 total ($500 x 480 months (40 years) = $240,000). The rest was growth from compound interest.
Although Angie contributed double the amount of what David is contributing, AND she made a total of $120,000 more in total contributions, her portfolio is still lower than David's balance because she started 10 years later.
Why is this? It's the magic of compound interest, often referred to as the eighth wonder of the world.
Example #3: Jane's Parents Started Investing For Her Since Childhood
Jane's parents understand the value of compound interest. When Jane is just age 10, they begin investing $300 per month into a custodial minor account for Jane's future. They invest the money into an S&P 500 index ETF fund and average 10% annual returns.
When Jane is an adult and gets her first full time job, she decides to keep contributing the $300 per month on her own just like her parents did. She keeps the funds invested in the S&P 500 ETF and still averages 10% annual returns.
What is Jane's portfolio balance at age 65 when she plans to retire? $8,574,423.61. She contributed a total of just $198,000 ($300 x 660 months (55 years) = $198,000). The rest is growth and compound interest. In other words, $8,376,423.61 of her total portfolio balance was due to compound interest!
Jane contributed much less money, but started investing much earlier and yet still her portfolio is almost 3 times larger than David's portfolio, and almost 4 times larger than Angie's portfolio! This is due to the magic of compound interest and a longer time being invested.
Who Got The Better Deal?
To summarize the above three scenarios, here's a table of the total contributions and the total balances of Angie, David, and Jane:
|Name||Monthly Investment||Age||Total Contribution (Principal)||Total Growth (Interest)||Retirement Balance At Age 65|
To further illustrate the power of compound interest, pay special attention to the column labeled “Total Growth (Interest).” Why? Because this column represents the growth gained from letting your money just sit and earn interest, upon interest, upon interest. In Jane's case, she took $198,000 and turned it into over $8 million just by investing regularly for a long time. That's like free money!
In short, the earlier you start investing, the less money that is required to build a healthy portfolio, and the more you can invest at an earlier age, the more wealthy you will become in the long run.
The best time to start investing is yesterday! Set the stage up front and begin with a long term mindset, and an amount you can afford. When investing for the long term, you create more opportunities to build wealth, achieve your financial goals, save for retirement, and have financial peace of mind.
Investing success doesn't happen overnight, but over years of consistency and patience.