After getting my first job 5 years ago, I wondered when I should starting investing. I thought to myself that it would be great to start investing early so I have more time to learn and recover from any mistakes I might make. This way, I would achieve my financial goals sooner in life. However, I had no idea how to start investing. On the other hand, I also thought that this young age is perfect to travel and spend on other hobbies and passions. That is an opportunity that will be harder to come by as life goes on and brings more responsibilities with it.
Therefore, I set out to learn about investing and how best to prioritize between investing for retirement and saving for other expenses. As I was studying about investing, I learned something that completely changed how I feel about this question. It motivated me to start investing as early as possible.
What if I told you that all else being equal, saving for 10 years could leave you with more money at retirement than saving for 20 years?
Yup – saving for 10 years could leave you with more money at retirement than saving for 20 years. The catch is that those 10 years have to be early in your life.
Let’s look at the reason behind this.
If you are aged 25 today, take a look at what your investment portfolio would look like if you started saving $100 every month today for the next 10 years. By doing this you would have saved $1200 at the end of year 1. Now, you invest that $1200. Historically, the average stock market return has been roughly 10%. Past performance doesn’t guarantee future performance but for discussion sake, let’s say you get this return going forward.
Thus, at the end of year 2, you have $1200 plus a 10% return ($120) giving you a total of $1320. Since you have consistently saved $100 every month, you also have another $1200 available for investing. Thus, your total portfolio size is $1320 plus $1200 which is $2520. You reinvest this and get a 10% return on $2520 which is $252 bringing your portfolio to $2772 at the end of year 3. Once again, you have saved $1200 throughout the year giving you a total of $3972 available to invest at the beginning of year 4.
If you let this process repeat, you’ll end up with $19,124.91 after 10 years at age 35. The table below shows how much money you would have at the end of each year.
|Years||Portfolio Value||Yearly Contribution||Total|
Now, let’s assume that at age 35, you stop saving $100 every month towards your investment portfolio. You simply let the $19,124.91 grow on its own. Assuming the same 10% average annual rate of return for the next 20 years, you would have $128,662.83 at age 55 – 30 years after you began your investing journey.
The alternative scenario is that you wait for 10 years before you start saving $100 monthly towards your investments. You start only at age 35 instead of 25. However, you save $100 every month for 20 years (instead of just the first 10 years and then stopping) until you reach the age of 55. Doing the same compounding interest calculation would reveal that you would end up with only $68,730!!!!! That’s almost half the money you could have had if you started earlier at age 25 and saved and invested for only 10 years.
What this reveals is that in spite of saving the same monthly amount ($100) for 20 years instead of 10, you would have lesser money than if you had started at age 25 and saved for just 10 years. Such is the magic of compounding interest. No wonder Albert Einstein called it the eighth wonder of the world. It is because of compounding interest that the sooner you start, the better as you have more time to allow compounding interest to work its magic on your savings.
What we can learn from this is that saving for just 10 years could potentially leave you with a bigger retirement account than saving for 20 years provided that those 10 years came early in your life. Investing has a snowball effect to it- the sooner you roll one, the bigger it is going to get overtime compared to a snowball that was rolled much later.
So what are some steps to start saving and investing? Below are the steps that worked very well for me and could work well for you too:
Step 1: Pay yourself first.
I made it a point to instantly set aside a chunk of my pay cheque for investments the moment I received it. This simple habit allowed my savings to grow remarkably well without much effort. There were no more months whereby I had no savings left because I mistakenly “spent it all”. Warren Buffet once said “Don’t save what is left after spending. Spend what is left after saving.” I was amazed how powerful these words are and you might be surprised too once you try it!
Step 2: Have a plan.
It can be all too easy to lose money in investing by not knowing what you’re doing. It is therefore of utmost importance to first get educated before executing any investing strategies. Moreover, there is no one size fits all investing strategy. Some of us will like to be more hands on with our investments and buy and sell actively whereas some of us may prefer to be hands off. Some of us may enjoy going through financial statements of companies while some of us would not. Accordingly, we will have different strategies. Once you’ve found a strategy you like, you are more likely to do it consistently and reap the rewards of compounding interest.
Step 3: Test it out.
In order to gain more confidence and overcome the fear of investing, it can help to first test out your plan using a demo account with fake money in it. This way, you can learn more about investing, ensure your strategy works and gain more confidence before starting to invest with your real money.
Step 4: Be consistent.
Once again it is important to emphasise that investing has a snowball effect thanks to compounding interest. However, the snowball can only get bigger if you keep it rolling. Likewise, in investing, starting off, having a great year or two and then stopping wouldn’t really get you to your goals. Imagine if in the example above, you made it to $2,520 at the end of year 2 and then stopped!
In summary, investing earlier rather than later could potentially leave you with a much larger investment portfolio later in life. The 4 main steps to get started are:
- Pay yourself first.
- Get educated in investing, and if you prefer:
- Practice using a dummy account before actually investing your real money.
For a complete step by step guide, here is my free course, “How to Start Investing.” It will show you how to overcome your fear of investing and start investing without any financial background.
Post your comments and questions below regarding what challenges you are facing around saving and investing – I would love to address them in my next post.
Wish you loads of success and happiness!
Disclaimer: The above article is for educational purposes and is not intended to act as financial advise.