If you’re under the age of 35, you have one of the most significant advantages out there when it comes to planning for retirement and financial independence. Time.
Many people put off investing because they think you need a lot of money to start investing. It just isn’t true. How much you can put away per month is important, but the data doesn’t lie and as you will see the amount saved has nowhere as much impact as how much time you can invest in your plan. In other words, the best time to invest is now – the sooner you start, the greater advantage you’ll have. In the article, it looks at how even investing 10 years earlier makes a huge difference on your nest egg, up to x 2 the amount of savings!
Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings. (Related article, here)
The graph from JP Morgan illustrates four different types of investors who invest $200 monthly but start and stop at different points in time. Both Chloe and Lyla invested in a 6% growth financial product until they were 65 with Chloe starting when she was 25 and Lyla starting when she was 35 with the result being Chloe’s investment is twice the size of Lyla’s.
By making retirement your priority it may seem a bit backwards to focus on this before any other financial goals. Still, because of the power of compounding returns, it makes it hard to ignore and starting early gives you more flexibility later on in life.
If you aren’t 25 right now, you might have a feeling of regret for the lost time, but no matter what your age is, the secret to financial independence is to start now. The value of time and compounding cannot be stressed enough. Here are a few ways to make the most out of your savings and to remedy the lost time
Start investing today.
Always invest your savings in a financial product that offers the benefit of compounding because it will always outdo simple interest. Read more here.
Frequency of compounding. If there is the option, go for investments where compounding is done quarterly rather than six months or annually.
Save the maximum amount of your earnings. When you can afford to save more, it is always best to do so to maximise time in the market.
Many of us delay investing (or fail to start at all) because we are either intimidated by choosing investments or we are afraid of the risk. See the following related articles which go through the different steps in selecting the correct investment.
Information provided by goBuoyant is general in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute formal financial advice. Remember, the value of any investment can go down as well as up.
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