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When Should I Start Investing?


Article Summary

  • Start early

  • Harness the power of compounding

  • Investing early and often, even with small amounts, is key due to the power of compounding over the long-term

Start Now

Thousands of people turn to Google everyday asking, “when should I start investing?” It’s a great question—one that people scratch their head and puzzle over. The truth is the best time to start investing is yesterday. The second best time to start is now. No matter how old you are, the same advice still rings true: Investing today is better than not investing at all.

Put Your Money to Work

The first and most important principle of investing is that there is never a wrong time to start the process. It doesn’t matter if you start investing with pennies or thousands of dollars — your savings will start to snowball. The power of putting away tiny amounts each month is realized in the long haul. You’ll be amazed by how your investments continue to grow and grow, especially if you have time on your side. 

The Power of Compounding

In a perfect world your parents urged you to invest the very first dollar you made from that lemonade stand when you were a child. That is to say that investing when you’re younger is always better in the long run because the longer you’ve invested equals more potential gains. 

“The strongest force in the universe is compound interest.” — Albert Einstein

Example
If you made a single $10,000 investment at age 20, it would grow to over $70,000 by the time you were 60 years old (based on a 5% interest rate). That same $10,000 investment made at age 30 would yield about $43,000 by age 60 and at age 40 that same investment would yield roughly $26,000. Ultimately, the longer that you put your money to work, the better it will work out for you.

Source

Risk

The younger you are when you start investing, the more risks you can afford. The opposite is also true. For example, if you are about to retire, your portfolio would be better off in safer categories, such as:

  • Certificates of Deposits (CD)
  • Bonds
  • Annuities

Although investing in categories with the lowest amount of risk is safe, investing in low-risk categories wouldn’t be the smartest move if you are younger and have time on your side. If you’re a younger investor, you have years and years of earning potential ahead of you, making it in your best interest to take calculated risks.

Risk Tolerance

Be honest with yourself and never put yourself in a situation where you are sacrificing paying bills on time just so you can put more money into the stock market. There is no guarantee with any investment. While uncorrelated assets, such as real estate and other alternatives are one of the most solid investments you can do with your hard earned money, there is always some level of risk involved.

Leverage Online Resources

The beauty of today’s technological ecosystem is that investing online is accessible for the first time. Not only is it accessible, it’s easy. In addition to online investing platforms, widespread education is available to any and (for the most part) free. Resources like financial blogs, Twitter, Meetups, and even online chat rooms and webinars make information sharing a part of daily life.

Tip: Accessing reliable and trustworthy information online is a fantastic way to learn about stocks and strategies that are worth looking into, but that may not be making headlines.

Time

If you’re investing at a young age and there is severe market downturn, you have time on your side. In other words, you have the ability to climb out of whatever loss you took. The same is true for real estate. Time and a long-term strategy is the name of the game, circling us back to the importance of starting today. Chances are, you’ve heard stories from your parents or friends about how they wished they’d invested in so much property “back in the day” because it’s worth more today than it was then. This makes the case for the mantra, “there is no time like the present.” The sooner you get going with your real estate strategy, the better.

Example
Rent in big cities is almost always going up. You may hear colleagues or friends complaining that “rent went up $100 again” and while that’s unfortunate for them, it’s a signal that the equity in the home is also rising.

Diversification

Having a diversified portfolio protects your hard-earned assets from market volatility, or the rise and fall of the stock market. In no other area of investing does the ol’ saying “don’t put all your eggs in one basket” ring more true than stock market allocation. If all of your money is allocated to stocks and there is a huge market downturn you’re leaving yourself vulnerable to dividend loss, reverse splits, and depreciation of stock value. Just ask investors who had everything in the stock market during the 2008 crash. Watching your net worth plummet is not a good feeling. Luckily there are asset categories that protect you from market volatility. Diversifying your investment portfolio with a healthy mix of real estate, stocks, mutual funds, and bonds mitigates your risk and protects your hard-earned assets. In fact, historic data shows that the general rate of inflation for real estate is a cool 3% to 5% based on national averages.

Source

Asset Allocation

Asset allocation is an investment strategy that balances out risk vs. reward by adjusting a percentage of each asset class according to risk tolerance and time frame to invest. Asset allocation is important because it determines how and when you will meet your financial goals. Not having enough risk could make meeting goals not as feasible and vise versa.

Emergency Fund

Every investor, no matter their accreditation status, should have an emergency fund ready to cover an unexpected life event like unemployment or a major repair. An emergency fund generally consists of 3-6 months of living expenses that you can lean on in case of an emergency. To do this investors take their monthly bills and calculate what goes out every month. Take that number and multiply it by the amount of months you want the emergency fund for.

 

When Should I Start Investing?

Quick Quiz

Review and answer these two questions to move on to the next section in the course.

Which of these tend to be more low risk when it comes to investing?

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.

As a general rule it’s best to have an emergency fund just in case something happens- how many months of emergency funds is best?

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.

Wrong answer, please select correct one.