The Benefits of Investing Early (and often!)

I’m in my 20s - why should I invest now? Retirement seems so far away…

Retirement may seem like something old people think about - but saving and investing “for your retirement”, just means having the ability to do the things you want to do later in life (when you are likely to have less income). Two things that are working for you now are time... and math. Make yourself comfortable with these two concepts: time value of money, and compounding.

• Time value of money

  • Saving a small amount when you’re young gives you the benefit of time. Even if you stop saving later, your money grows more if you start investing young.

  • In the example on the right, Saver 1 started investing at age 25, and only invested for 15 years. Saver 2 waited until age 35 and invested for 30 years. Despite
    investing 15 less years (!), Saver 1 has ended up at retirement
    with almost $400,000 - or 50% - more that Saver 2!

• Compounding

  • Time also benefits compounding interest, which is when you earn interest not only on the money you deposit, but also on the interest itself. Your money grows exponentially.

Why not just invest in a savings account or something safe?

• The younger you are, the more you can take risk in the equity (stock) market, as you have a long-term horizon that can accommodate fluctuations in the market. A common rule of thumb is to have 100 minus your age in higher return investments, so 80% of your investments could be in the stock market (like an index fund*), and 20% in something less risky (like a traditional savings account or bonds).

• Let’s say you put money in a savings account, and, at the same time, put the same total in an investment account. Given average growth assumptions and the benefit of compound interest, the difference between the two adds up quite a bit over time.

What is an IRA?

An IRA, or individual retirement account, is a tax-advantaged way to invest money. For younger people,  Roth IRAs are often the preferable choice. That’s because you deposit money that has already been taxed, and you’re probably in a lower tax bracket now than you will be later in life when you’re earning more. In contrast, with a  traditional IRA, investors get a tax deduction now, but pay taxes when the money is withdrawn. Your Roth IRA balance is what you will actually have to spend; in a traditional IRA, it will be reduced by the amount of tax you will owe later.

Another upside to a Roth: In an emergency, you can withdraw contributions — but not any investment earnings — without penalty. (Not that you want to do that!)

OK I’ve put money in an investment account, now what?

• Adding money regularly - even the smallest amounts - can lower the cost of your investments using a concept called Dollar Cost Averaging.

• Take a long-term view - invest early, contribute regularly, and let time and the market do their work for you.

What should I do if the value of my account goes down?

• Although the markets go through plenty of ups and downs each year, the trajectory is generally up over time. Take the S&P 500: From 1980 to 2021, its average rate of return, adjusted for inflation, was over 10%.

• Be patient, and think long-term. Don’t worry about the “paper losses” during down markets. You’re young and have plenty of time to let the market work for you.
  
  

*Index funds seek to match the risk and return of the market based on the theory that in the long term, the market will outperform any single investment.

Future topics:
Credit Cards
Budgeting
Taxes
Financial Education
Emergency Funds
Healthcare Funds

The information contained on this Website and the resources available for download through this website are not intended as, and shall not be understood or construed as, financial advice.