Everyone’s investment journey starts at different times. Growing up, investing wasn’t something that was talked about in the family largely because no one knew much about the subject. Luckily, I stumbled upon a few books that taught me some of the basic investing concepts, but I never got passed learning about it and actually applying it until I graduated college. As much as I wanted to invest in high school, I only had Christmas money that I had been saving for a few years. Knowing now that investing as soon as possible is beneficial in the long term, I would have invested the $20 I received in Christmas 10 years ago and potentially tripled or quadrupled my initial capital. With that said, if you are mulling over whether or not you should invest, I provide you 3 reasons you should invest as soon as possible.
1. Time Value of Money
As I sit in my 8AM investments class half awake, one of the first topics he started to review was the concept of Time Value of Money (TVM). TVM means that money today is worth more than money at a future time because of its earning potential. Many of you might be scratching your head, but simply speaking, $1 today is worth more than $1 tomorrow because I can use that $1 today to invest. For example, if someone was to offer to give you $1 today or give you $1 next month, you would take $1 today because you can invest that $1 to hypothetically make $2 or more. TVM also highlights that your buying power reduces over time meaning that $1 today can buy more things than $1 next month because of inflation. Inflation occurs when your purchasing power decreases and prices of goods increase. For example, in 1913, a gallon of milk cost 36 cents, today a gallon of milk at Walmart costs roughly $3.18 all due to inflation. This means that in 1913, you purchase roughly 2.78 gallons of milk with a $1 whereas $1 today would only afford 0.31 gallons. With all that said, I’m a proponent of saving, but to take it to another level, investing allows you to hedge and likely beat inflation.
2. Compound Interest
Albert Einstein once said, “Compound Interest is the Eighth Wonder of the World. He who understands it, earns it, he who doesn’t pays it.” You may be contemplating what in the world Einstein was talking about but compound interest really just means the accumulation of interest from previous periods. In order to better understand compound interest, we can compare it to simple interest. Simple interest is calculated based on the initial capital or principal amount. For example, if you took a $1000 loan with a 10% simple interest and plan to pay it off in two years, the total amount of interest accrued would be $100 at the end of year 1 and another $100 in year 2 totaling $1200 that needs to be paid. In contrast if you took a $1000 loan with a 10% compound interest and plan to pay it off in two years, the total amount of interest accrued would be $100 at the end of year 1 and $110 in year 2 totaling $1210 that needs to paid. In hindsight, the concept of compound interest should encourage you to invest as soon as possible because the longer your investment time horizon, the greater chance your initial capital is able to compound.
3. Retire Early
Assuming you need $1 Million to retire, if you saved $2000 a month or $24,000 per year, it would take you roughly 42 years to save that amount. Investing as opposed to saving gives you the opportunity to get you to $1 Million incrementally faster depending on your investment strategy. For example, if you saved roughly $24,000 each year and invested in an index fund that followed the broad market and returned 14% every year, you would have a little more than $1 Million in 14 years compared to 42 years saving. Assuming you went the investment route and retired once you had $1 Million worth of assets, you would have been able to retire 28 years earlier than if you were to save that amount. 28 years that you could have been living out your life, focusing on your health, and spending time being with your loved ones.
Investing is a broad term that means to expend money with the expectation of getting a profit. Although there are wide variety of ways to invest, investing should be a strategy that you should start looking into and incorporating into your long term financial plans.
