You may think that because you’re in your 20s, you’re too young to start thinking seriously about investing, but you couldn’t be more wrong. Thanks to a little something called compound interest, if you invest a little bit every month while you’re young, then you’ll be in good shape when you start approaching retirement age. That’s not the only reason to start investing early though.
Time is On Your Side
Just because someone is older doesn’t necessarily mean that he or she has more money to invest with. This is why getting a jumpstart on your investments is a good idea. Even if you only invest a little, it will be worth more later. Here’s a simplified example:
According to Bankrate’s traditional IRA calculator, if you opened a traditional IRA at 25 years old with $100 and contributed $25 a month until you were 65 years old, by the time you hit 65, you’d have invested $1,000, and your account would be worth over $5,000.
Obviously, $5,000 will not fund your entire retirement, but using that same formula, if you contributed the maximum amount allowable for a traditional IRA — $5,500/year or about $460/month, — your account would be worth over $1 million, which some people consider to be a magic number for retirement. When you’re 25, a nearly $500 payment every month may be the same amount as your half of the rent, but as you can see, even only investing $25 a month will grow your money over time, and you can increase payments when possible.
Options Open Up to You
Investing isn’t only for your future, it’s also for your children’s’ future. If you have kids who you want to send to college, then open up 529 accounts for them. These funds will grow tax-free over the years and you can use them for your children’s higher education. If you plan to buy a home in the future but are nervous you can’t do it on savings alone, talk with a financial professional and put your money to work for you. If you want to purchase a home in five to 10 years, go with an aggressive portfolio to help you make more sooner.
But what if the market takes a turn for the worst, as we’ve seen happen before? It’s ok because you’re young and you have time to stay invested and make up for those losses.
Less Stress Overall
There’s nothing worse than putting something off until the last minute and realizing there truly isn’t time anymore, and you don’t want that to be the case with your retirement. Think of these two scenarios
You’re 55 years old and starting to think about your retirement. Your kids have all moved out, you’ve done well in your career, and you’ve been steadily investing a comfortable amount for the last 30 years. Your portfolio is doing well, and you’re rebalancing it to have more conservative investments. The next step is simply deciding when to hang up your shingle.
You’re 55 years old and while satisfied with your career, you spent a lot of time going on luxurious vacations because you only live once, right? But now your friends are beginning to talk about retirement and suddenly the monthly payment you spent on that boat doesn’t seem so smart after all. You have great memories but those won’t fund your golden years, and you know you can’t live off social security alone… so what do you do?
One scenario is clearly less stressful than the other, yet many people in their 50s still haven’t begun saving for retirement. Be smart, start sooner than later, even if it’s only a small amount.