The great thing about being young is that you have your entire life ahead of you. However, most people will not begin to think about their future lives until they are 30, 40, or even older. It is not that difficult for anyone to be financially free by retirement. You just need to be committed to investing your money and in yourself from a young age. Most will not believe this notion, but the facts prove that it is true. You are better off if you start investing now.
The Benefit of Investing at Age 20 vs. 30, 40, or 50…
The simple answer to why one should begin investing at a young age is because time has the most significant impact on investment returns. Historically, the financial markets have continued to rise over the long-term. Economies have proven to expand and contract, but increase on an absolute basis long-term. With this knowledge, it makes perfect sense why starting to invest younger will have a significant impact on your future financial health. If you start to invest in, say, the S&P 500 (very common investment index, explained in greater detail below), five years before retirement, the markets may be in a period of contraction when you wish to withdraw funds, but the chance that this issue negatively impacts someone over the course of 40 years is very unlikely.
Start Investing Now to Harvest Compound Interest: The 8th Wonder of the World
Let’s make it simple: compound interest is interest gained on interest. Say you put $100 into a 1% interest rate savings account. This means that the bank will pay you $1 per year for as long as you hold your money in that particular account. So, at the start of the second year, you will have $101, and instead of buying a coffee with that $1, you leave it in that savings account. You will then be making 1% interest on $101 instead of $100. You are now probably wondering why a little extra money is so significant.
Now, let’s take a different example. You managed to save $10,000 by the time you are 25, which is reasonable for most people who are focused on saving their money. By the time you are 65, investing that $10,000 in a basic stock index fund (one that tracks the S&P 500), would cause that $10,000 to become a little over $300,000 dollars! (You read that correctly – average historical return of the S&P 500 is 9% with dividends reinvested, and when compounded, this equates to approximately 31x initial investment over 40 years). Not too shabby! This also assumes you never save or invest any money past age 25, which is highly unlikely. However, if you continue to work throughout your life, this process of compounding interest CAN leave you with a safety net in the form of millions later on in life. There are no guarantees of course, but this process of investing young and taking advantage of compounding interest has been making people wealthy for centuries, so why not take advantage of the power of compound interest and start investing now.
Exactly Where to Start (Step-by-Step Instructions)
Okay, so you now have $1,000 saved up from working your BUTT off at the local grocery store during high school. You could get that new speaker set everyone else has, but instead you do this:
1) Find an online broker:
- Merrill Edge
- TD Ameritrade
These are very reputable online brokers. (Brokerage means that these companies will place investment orders in stock and bonds from your personal account.)
3) Invest in STOCK INDICES, not individual companies (unless you are properly educated on making investment decisions)
- An index is any investment pool that plans to track the overall stock market
- We will put up another article pertaining to basic nuances of the investing world, but, for now, look up the S&P 500. This index tracks the 500 largest U.S. companies, and is commonly referred to as “the market.”
In a nutshell, index investing allows you to eliminate the risks inherent in individual stocks while ensuring that you get at least the same return on your investments as the overall market is yielding.
4) Reinvest Dividends!
Any online brokerage platform will provide you with the option to automatically reinvest your dividends. THIS IS COMPOUNDING. (As an FYI – dividends are profits a company shares with you, in basic terms).
- Most indices you invest in will pay a dividend (One that tracks the S&P 500 will currently pay about 2%). If you are reinvesting these dividends every year, you will be gaining interest on each reinvestment that you make.
- This has a HUGE impact over many years.
4) Start Young!!!!!!! – The Thesis of This Article
- The more time you have to gain interest, the more money you will have in the future
- If you wait until age 30 or 40, you will not have nearly as much time for your investments to grow
What are you waiting for? Please, start investing your money now. I am writing this article hoping that All Things Finance can help people change their financial lives. However, only you can take action to change your life… so, get started!
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