Isn’t it funny that we are expected to make the biggest decisions of our lives when we are young? The answer to when to start investing? It’s earlier than you think.
We get married, we pursue a career path, maybe have children. We have to make quite a few decisions that will affect us the rest of our lives and determine our future trajectory. The decisions we make now can lead to heartache and loss, or security and success down the road. Some of us are fortunate to have parents to steer us in a good direction, while others lean on friends, extended family, or (gasp!) blogs. When to start investing for the long-term is also part of this equation.
When to start investing? The answer could mean millions.
We know that the decisions we make now will have important consequences for the future – not only for us, but also our spouse, children, etc. It’s no wonder we delay establishing a long-term savings plan. If we start off on a bad foot we may choose a bad investment, establish a short-sighted plan, and potentially lose out on hundreds of thousands, if not millions, of dollars of compounded market returns.
Big “little” decisions
Does this mean that an investment or savings plan exists that will consistently spin off stellar returns every year for the next 40 years? No. However, the most well-informed big decisions in life are nearly always preceded by hundreds of small decisions. The same is true of a good personal financial plan and when to start investing.
You may be some years away from earning the maximum income you were trained for, but you have already made a hundred small, strategic decisions that got you where you are now. Your financial trajectory going forward will depend on the choices you make now and the immediate future.
Will your decision on when to start investing cost you?
We are very busy people. For young professionals in the first half of a potentially lucrative career, long hours goes with the territory. Working harder (and smarter) is how we get to the next level, both personally and professionally. However, it also means we defer some big decisions into the future. While we may potentially have more available to start investing our 401ks or IRAs 5 years from now, waiting can be very costly. Here is an example of the time value of money:
Say you start investing at age 30 and you want to have $1 million in your portfolio when you retire at 65. For illustrative purposes, we’ll ignore the eroding effects of inflation on your buying power. We’ll assume that your future returns are the same as what the S&P 500 index did over the last 35 years. These assumptions include the Great Recession, the Tech Bubble, and the rest. This is about 8% compounded monthly, and we’ll be conservative and assume you don’t reinvest dividends.
The difference between investing at 30 instead of 35
At age 30, you’ll have to contribute $435.95 per month to reach your $1 million goal.
If you wait only 5 years and start investing at age 35, you’ll have to contribute $670.98 per month. Waiting 5 years will cost you more than $235 additional dollars per month!
Let’s put this into perspective. If you’re making 100k per year when you start saving, at age 30 that’s 5.23% of your gross income. All things being equal, that’s 8.05% of gross income at age 35.
What can you do? The answer to when to start investing.
The answer to this question is easier said than done – you do what you can! Just don’t wait to do something. One thing I won’t do is recommend a “rule of thumb” percentage to set aside for long-term investing. Your budget, time-horizon, risk-tolerance, and personal goals will dictate a contribution level that is right for you.
What I would do is quote Emerson – “The reward of a thing well done, is to have done it”. Paying yourself now, no matter the amount, will save you money and stress later.
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