The Importance of Early Investing
There are many logical reasons to start investing at a young age, even though most people won’t start until they approach retirement age. This is often due to people not knowing much about investing or thinking that they’re not financially able to invest. The thing to remember is that you don’t have to be rich or old to invest. In fact, many of the rich get rich from investing.
What is compounding? Money grows the longer it is left alone due to a process called compounding Compounding is the process of interest earned on top of interest. If you invested $2000 a year into an investment portfolio or retirement account for 20 years ($40,000), compounding can grow this money to over $300,000 in an additional 20 years. By the 20th year this money would have already grown to over $87,000 (using a 10% compound interest model). With compounding, the sooner you start investing the better the return; the later you wait to invest the harder it is to see a real return on your investment.
The Hidden Benefit
One benefit to early investing that doesn’t seem to be a huge bonus as far as growing your money, but it improves your current lifestyle and athat’s the fact that investing teaches you better spending habits. If you know you have to have a certain amount of funds available to live and to invest, you will be much less likely to overspend or to create opportunities for debt. The most important thing to remember about this point is that it only really works when you invest sooner than later. Investing after incurring debt doesn’t benefit anyone, but the creditors who will inevitably collect your funds plus interest.
One of the Pluses to Early Investing
Another big plus to investing earlier is having a better life after retirement. You see it all the time, commercials about social security benefits changing and how seniors are often forced to live right on the poverty line—don’t let this be you. If you invest in a ROTH IRA (individual retirement account that offers future tax breaks) at a young age you’ll be less likely to experience that kind of lifestyle. In fact, you’ll be abortab and afford things that most people retirement age would only dream of having.
The Power of Compound Interest
The Definition of Compound Interest
Okay, so we said that compound interest is exactly what the name implies—interest on top of interest, but there is a little more to the process than that. Investopedia gives a wonderful definition, which is that compound interest is interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. This allows the principal amount to grow much faster than simple interest would grow it since it is interest on interest instead of only allowing the money to grow by a set percentage (simple interest).
Things to know about compound interest:
Just about any investment can earn compound interest.
The earlier you invest the more your money will grow.
Credit card companies use compound interest to earn more money off of minimum payments.
Banks don’t offer much in the form of interest percentages, but mutual funds offer a higher return rate on average.
You don’t have to invest a huge amount for compound interest to work for
Who Benefits from Compound Interest?
Compound interest works for everyone. True, you may not see a huge improvement in your principal amount right away, but this is a tool that is meant to give you a better return over time.
What is a Portfolio?
Portfolios also hold information about you risk allocation, which is calculated based on the value of each asset within the portfolio. Risk allocation is used to calculate your risk/reward ratio. This information is imperative and is often used to keep people from investing in things with more risk than reward in the short term. However, it’s important to remember that if you’re investing in stock, the riskier it is, the more chance you’ll have at earning a greater return (This is the exception to the rule in most cases).