I have learned a lot over the last few years about investing. I wish schools did a better job preparing us for taking control of our finances. I started investing in my retirement the day I joined the US Navy. Someone came into our classroom at boot camp and talked about setting up a retirement account known as TSP (Thrift Savings Plan). They recommended a blended portfolio that was “set and forget” based on age and I’ve been contributing to it for the last 16 years. Retirement Plans are about as passive as it gets when investing.
At around 32 years of age, I started investing more actively and now own shares in about 25 different stocks which have made me a healthy return over the last few years. I continue to grown my investments and plan to keep contributing to investing over the years to come. So, what is the best age to start investing?
The Best Time to Start Investing Is Now!
That headline really is the simplest answer but that doesn’t mean you should start investing everything you own right now in the stock market. Everyone’s unique situation may warrant different investing priorities and that’s why I’ve decided to write this article. I want to help you consider some options so that you can decide for yourself what makes the most financial sense for you.
Before You Invest, Take Care of Debt!
There is nothing more crippling to your financial success than stockpiling debt. If you have high interest car loans, student loans, or worse, credit card debt, you really should create a plan to pay this down before you ever think about investing. To some people, this sounds like a “no brainer” but to others this may bring on additional questions so I want to share my reasoning and provide an example.
If you have debt, you are paying interest. That interest is being charged against you for the lifetime of the balance so until it’s paid off, you will continue to pay more. Investing involves risk and what makes the risk worth it is the fact that over a long period the market has proven to reward that risk. On average, including down markets and years that yield losses, the market has still gone up around 8% a year.
Let’s say you have a credit card with 16% interest and a balance of $3000 and want to invest $2000 in the stock market. You are guaranteed to pay $480 that year for your credit card interest (0.16 x 3000) and you on average should make $160 (.08 x 2000) from your stock investments. I said on average because sure you could have a great year and earn 20% from your stocks and get $400 but you could also have a down year and lose 10% or $200. Earning in the stock market isn’t guaranteed one year to the next.
What is guaranteed is that your credit card will charge you that 16% consistently each and every year.
Pay off all of your debt first. You will find no better advice.
Before you Invest, Have an Emergency Fund
Time and time again, I hear about how people don’t have enough money to cover emergency expenses. This can range from medical bills and sudden loss of employment to something like home or car repairs. Whatever the case may be, you need to have some money saved aside to cover these types of events.
If you don’t have an emergency fund, you are very likely to still get what you need paid for…by using credit. Now you’re right back to the previous issue of needing to pay down debt. If you would like more information on how to save for an emergency fund read my article that gives 3 easy methods to save for an emergency fund.
Oh boy, nobody wants to hear this one. Do you have a budget? If you don’t, you really should consider making one. A budget is the best way to ensure you money is going where you want it to go. Have you ever woke up a week before pay day and thought, “Where did all of my money go?” I know it has happened to me before.
The day I started tracking my expenditures was the day that I discovered just how much money I wasted on frivolous habits and unnecessary purchases such as $120 on Starbucks, $50 in streaming services, and $80 on vending machine drinks and snacks.
I’m not saying to cut those all out. Maybe keeping the coffee is worth it to you. I dialed mine back a little and got rid of the vending machine junk and ended up with an extra $100 to use in more deliberate areas of my life.
Why It’s Important to Start Investing Now
The sooner you start investing, the more potential you have to make. This is because of three main reasons: You have longer to save, so you save more, you have a higher chance of averaging out a higher yearly payout, and lastly you can sit back and watch compound interest take your investment to new heights.
The Longer You Save, The More You Have…
Although this sounds really simple, saving and investing money isn’t easy without discipline. If you save $100 a month, you’ll see from the graph below that it takes a very disciplined approach to consistently save each month to reach a financial goal. If any month is skipped or if several months are skipped, the results will obviously suffer.
Now I realize I didn’t account for interest and that’s because I’m about to illustrate that very principle but I wanted to show how consistent saving and investing leads to consistent growth.
Longer Time Horizon = More Stable Earnings Performance
Imagine if you invested all of your fortune in the stock market in 1928, You would have enjoyed 1 year of an incredible investment! However, just 2 years after that growth you would have not only lost what you made but you would have lost almost everything.
Let’s say you invested in 1966 and kept your investment for 10 years. You would have walked away with just about the same amount you invested. You might as well had saved it in a bank account.
Now look at if you had invested your money in 1928 for 40 years. You would have been much happier.
To further illustrate this, I’ve run a simulator from DQYDJ.com that shows how this averages out over different time periods:
This graph is showing data from all time periods between 1896 all the way to 2019. I wanted to show you that yes over any one year period, you could have gotten lucky and made an average return of 12% or even a maximum return of 129% but you also ran the risk of losing more than 2/3 of your entire portfolio.
The amount that your average return goes down over time is a very small price to pay to ensure that you never experience a loss like that. Investing over any 25 year period in history proves an average of 10% and a minimum yearly increase of 3.4%.
Compound Interest Is King
This is my favorite part of the article because I get to show you the power of investing that same $100/mo from the original example and show you how the earnings’ performance of the stock market above can really be incredible.
If you’ve never heard of compound interest before, I’m going to blow you away. If you have, you’ll still probably be surprised at how much of an impact it can truly have on your portfolio when illustrated.
Compound interest refers to the amount of interest you earn based on an initial principal (investment) and all interest from previous periods. So rather than just say that $100 earns 5% for 5 years is the same as 100 x 0.05 x 5 =$25 of interest, it recognizes that after the first year, 5% interest is calculated on the original $100 plus the extra $5 years you made that first year. So compounded, $100 earning 5% for 5 years is actually $128.42. I know…that’s not a very exciting example.
Let’s increase the time frame though visually and the amount for a clearer look at the potential:
Below you will see If you were to just invest $100 and just let it sit at a conservative 3.457% which we saw above happens after 25 years in the worst case scenario. You will also see if you were to invest $100 dollars and just let it sit at 10% interest which seems to hover around the average returns over time.
This may not seem the most exciting but let’s not forget all you did was throw $100 in an index fund and forgot about it…
Now let’s see if you had a plan to invest $100 every month with discipline over the same time frames and under the same interest rates:
Just for fun, let’s see that last scenario in a graph!And that’s why it’s important to start investing early and invest for the long term.
Hopefully you have found this encouraging! The above information is based on if you placed your money into a Dow Jones Index Fund but obviously you could apply the same logic to other index funds or passive investments. If you choose to invest more actively by picking stocks and managing your portfolio, your results could be different.
I am not advising you what to do with your money and this isn’t even the same model that I’ve adopted. I just wanted to illustrate with you the importance of starting to invest earlier in life than later.
This is also not to discourage you if you are already older either because whether you are 20, 30, 40, 50 or 100, you won’t make any money unless you start investng today! The sooner you take control of your investing and get started, the more rewards you will see.
You can get started in passive investing through apps such as Acorns which you can read my full review of the Acorns App which I recommend. I currently use it as well to save for medium term goals but it is also perfect for long term goals as well.
If you want to invest more actively and choose stocks, there is no better app than Webull which has phone apps as well as a desktop platform where you can buy and sell stocks with no commission fees! Read my full Webull Review for a better understanding of what Webull can offer you and get one or two free stocks just for signing up!
Thanks for reading! I hope you found this article helpful and learned something to take with you in your investing journey. If you have any questions or comments, I’d love to hear from you below!
Now, let’s start investing!