To keep things simple, the best time to start investing is as soon as possible. It would be great to end the story there but, there is more to say. The truth of the matter is that there are some things that should be taken care of before investing. If you have high interest debt, such as credit card debt, pay that off first or it will eat away at any saving or earnings you have elsewhere.
Time Value of Money
The value of time in your investment massively outweighs the amount of money you put into your investments. So, even if you don’t have a tremendous amount of money to put into an account now, with patience that money can grow to provide tremendous returns. Many people think they don’t have enough money to invest now but, the truth is, the longer you wait to invest the more money it is going to cost you.
For example, if you were to invest $500 a month over the course of 20 years in an investment where you received five percent monthly compounding growth, you would have $205,516.83 at the end of those 20 years. If you instead contributed only $100 a month into the same investment over 45 years, your money would grow to $202,643.73 after those 45 years.
This might not seem impressive since you actually have a little less money in the account that was growing for 45 years, but it is significant when you look at the amount of money invested. In the first investment, with $500 a month over 20 years, you are contributing $120,000 over that time. With the second investment of $100 a month over 45 years, you are contributing less than half of that at $54,000. This means that just with added time in the investment, less than half of the money will bring you the same amount of income. But, it gets more interesting.
The Compound Effect
The five percent rate of return is quite conservative. If you were to invest this money into an account that provided a more generous rate, the results are dramatically different. Keeping everything else the same and increasing the compounding interest up to eight percent, the $120,000 invested over 20 years grows to $294,510.21 while the $54,000 invested over 45 years grows to $527,453.99. That is almost 80% more money with less than half of the investment.
Of course, it is easy to say this could happen for you just by investing $100 per month over a long period of time. But, when you are just scraping by month-to-month, it might be difficult to imagine where that $100 is coming from. If you are tracking your spending, it might be easier than you think. How much money are you spending each week eating out and going to bars? Maybe, go out once a month instead of every weekend. How much money could this save you without completely neglecting your social life? What if you picked up another shift or two at work? For a small sacrifice in the short-term, the long-term results can be life altering.
But wait. . .
If you’re smart, you’re thinking about how investing doesn’t have regular rates of return like the projections above. You are absolutely right. Even while the returns might not be as regular, they are much higher. With the waves and troughs of market movement over time, you have a much stronger chance of having a comfortable retirement. Study history and it displays this over and over. The only way you will be able to ride out the down cycles are if you give your investments time to grow.