Freedom Life Planning

The Ultimate Guide to Financial Planning

Three Benefits of Starting to Invest Early

So you are young, broke and ready to start your career? Perfect! You are in the right place of your life to take the right path towards wealth. You have the best resources available to you, time and energy. It may be hard to believe it now, but if you take the right steps now, you have a very strong chance of being very successful in your finances and at building wealth throughout your life. In this article, I will go over the top 3 advantages to starting right away, as early as you can.

Compounded Returns

The thing about compounded investment returns is that the overall duration has the biggest impact on your results. Starting to save in your twenties will be significantly more effective then starting in your thirties. You will have an extra 10 years of compounding time to your advantage. This will allow you to either save less to reach the same objective, or save the same amount to have more wealth throughout your life. The graphs below show the growth of investing $6,000 per year at 8% return on investment annualized. This works out to $500 a month, an easily obtainable target for working young professionals.

As you can see, due to the exponential growth over time, the advantage of starting early is tremendous. Looking at the investment value at age 65, the 20 year old will have grown their wealth to $2.7 Million. The 30 year old will have $1.2 Million and the 40 year old will have $518,000. For each decade earlier that you start, you will have more than double the wealth. If your goal is not to build a huge investment by 65 but prefer to spend your money sooner in life, look at starting early as allowing you to get away with saving less. That will give you more spending money throughout your life.

Less Expenses

In addition to having the benefit of time, you also have less expenses early in life. You may be renting a small apartment instead of owning and maintaining a big house and no children yet. You may be tempted to spend that extra cash on more eating out and other luxury spending. However, setting a proper balance early on will allow you to maintain a better and continually improving standard of life later on. During your twenties, if you do not have any children yet, you can put aside a large portion of your salary towards investments. This may allow you to get away with hardly any savings during your thirties, when expenses of young children are highest. Keep in mind that savings during your twenties are worth more than double that of your thirties. Even in your 40s, as your advancing career will make saving a bit easier, you still have older children to take care of, and your savings would need to be around 5x as high to have an equivalent impact on your investments as savings from your twenties!

Building Good Habits Early on

The third benefit of starting to invest early on is that you start to build great habits towards efficient spending and investment management from a young age. The wealth of knowledge, discipline and experience that you will obtain will bring about positive habits throughout your life. By eliminating or avoiding wasteful spending early in life, you won’t feel the “need” to continue these patterns later on. As your wealth grows, you will spend it more wisely getting more happiness in return for you and your family.

Can you Catch up?

Some of you are probably reading this and may already be past your twenties and wondering, can I catch up if I didn’t start early? The answer is Yes, but it will be a challenge. It will require investing more of your savings and staying disciplined about it. I’ve updated the graph below to show what the curves look like for someone trying to recoup lost time in their thirties or forties by augmenting their savings rate.

For someone who is thirty, you will need to save $1,118 a month (or $13,418 a year) to catch up, by age 65, to the previous example above of saving $500 per month. For someone who is forty, you will need to save $2,616 a month (or $31,400 a year) to catch up. Also, keep in mind that with these increased saving rates, you will only catch up by age 65. Until then, the person who started earlier will be ahead, which really shows how advantageous it is to start saving early.

However, you can’t change the past, so whatever age you are, the time to start is now.

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