If you’re under 30 and you haven’t started investing yet, you’re not alone. In fact, as CNBC reported in 2018, less than half of American adults under 30 are invested in the stock market.
There are various reasons for this. Some young adults are wary of what they’ve heard about the stock market crash in 2008. Some may feel that they can’t afford the extra cash. Others may believe that they can sacrifice investing small amounts now in favor of larger investments later.
After all, when you’re halfway up the corporate ladder in ten years, you can always make up the lost time — right?
Even if you invest a significant portion of your paycheck later in life, you’ll still have lost out on the growth and opportunities that come with starting earlier. Inflation alone eats away over 3% of your purchasing power every year — but investing returns an average of 10%.
To further put things in perspective, we’ve gathered a list of 10 reasons it’s important to start investing early.
10 Reasons to Invest Early
1. You Can Slash Your Tax Rate
Capital gains taxes can eat into your investment earnings — but investing early reduces the impact.
The short-term investment capital gains tax (on investments held less than a year) is equal to your income tax rate. For most of us, that’s about 25% of our earnings.
However, if you hold your investments for more than a year, capital gains tax can fall as low as 15%.
2. Stocks Rose 1,100-fold in 70 Years
That’s 10 reasons to invest early right there.
That’s right. Over the course of the past 70 years, stock market prices have risen by 1,100%. To put that into context, if you had invested $1,000 in the stock market 70 years ago, you’d be worth over $1 million today.
But if that’s not enough reason to get started early, consider that…
3. You’ll Never Have a Higher Risk Tolerance Than Now
The younger you are, the greater your risk tolerance — or in layman’s terms, the more time you have to make up your losses.
For the most part, the investments that yield the greatest returns also carry some of the highest risks. While investing in an innovative new startup may make you rich overnight, it can also ruin you in half the time.
If you’re older or closer to retirement, taking on these risks means putting your retirement savings in jeopardy. The closer you are to retirement, the riskier these moves become.
On the other hand, if you’re younger, you have more time to make up the losses you incur. While seeing your life savings get sucked into the market forever may hurt, at least you aren’t jeopardizing your entire future.
4. You’ll Gain More Experience
The only way to get good at something is to do it repeatedly for extended periods of time. Just as learning a new craft takes years to truly master, so too does investing.
After all, there’s no substitute for experience.
By starting early and making rookie mistakes at a young age, you have more time to recover and examine where you went wrong. Whether the lesson is to hold solid positions during a global pandemic or not buy into overpriced stock on short-term news, learning it will serve you in good stead.
And, because you made these mistakes in your prime, you can adjust your strategy for your future investments at an early age. Hello, increased potential for riches!
5. Compound Interest Works in Your Favor
Speaking of increased riches, another thing to consider when looking at your investment timeline is the effect of compound interest. This is one of the best ways to earn consistent returns in the stock market — but it takes time.
Essentially, compound interest is the interest you earn on your interest. When you invest in the stock market, you’re paid interest on your capital to offset the risk. If you reinvest this interest, you increase your capital, thereby increasing your earning potential.
To give an example, let’s say that you invest $200 per month every month for 10 years at a modest return of 5% annually. In that time, you’ll invest a total of $24,000 and earn over $6,300 in interest.
However, if you invest the same amount consistently for 30 years, you’ll tuck about $72,000 into the market — and earn over $88,000 in interest.
6. You’ll Save More and Spend More (Wisely)
A perhaps unexpected benefit of investing early is that you build better spending habits naturally. Because you’re focused on your budget, you’re likely looking for ways to cut excess expenditures from your life.
Over time, this leads to you naturally developing better spending habits — and tucking your savings into the market. This will serve you in good stead on your next pay raise, as you’ll be more likely to save the extra cash rather than spend it immediately.
As such, by learning these lessons earlier rather than later, you’re also savings yourself thousands in unnecessary impulse buys.
7. You’ll Build Greater Financial Security — and Actually Meet Your Goals
By starting your investing career early, not only will you build good habits, but your bank account as well. As such, you’ll be more financially prepared throughout your life.
Whether you need to pay unexpected expenses, make your house payment in lean times, or just meet your financial milestones, you’ll have a head start waiting for you in the stock market.
Furthermore, just by having the extra capital moving in the market for so long, you’ll be that much closer to retirement. Speaking of…
8. Your Retirement Goals Will Be Within Reach Earlier
There are a few ways to retire before age 65.
One is to work hard to climb the corporate ladder, save every penny you can, and cash out your savings account a few years early.
Another is to take on extra jobs through your life and tuck that money away on top of your 9-to-5 paycheck.
Or, you can invest a few hundred dollars a year in the stock market and watch your bank account swell exponentially.
While an average 10% interest annually may not seem like a lot, over time and with compound interest, the pennies really add up. If you invest early and don’t let a panicking market push you out of valuable positions, you can retire much earlier than 65.
Therefore, the younger you invest, the younger you can retire.
9. You’ll Collect the Interest
Another undervalued benefit of investing early is that, by increasing your wealth over time, you have the ability to invest in assets. In turn, you can put these assets to work for you.
For instance, rather than paying rent the rest of your life, why not buy a house?
As a matter of fact, why not buy two — and rent out the second one yourself?
Or, rather than taking out a loan from a friend or institution to pay off your car, why not loan the money out to others? (For a small fee, of course).
By investing early, you build capital that you can use to create more capital, both in and outside the stock market. The earlier you invest, the more you’ll make, so the more you can invest, so the more you can…
10. You’ll Regret it if You Don’t
The best reason to invest early is also the simplest: you’ll regret not starting younger.
Time flies by, and the older you get, the faster it goes — so get a jump on it now. The longer you wait, the less years of your life you have to invest.
Don’t waste financial opportunities on the promise of “getting started tomorrow”, because tomorrow” may never come.