Even if you’re new to the world of investing, you’ve probably heard that starting early is key, while waiting to invest can cost you.
Why is it important to invest as soon as possible, and what are some of the easiest ways to get started? Here’s what you need to know.
Why Invest Early?
The Magic of Compounding
As a young adult, you have something very valuable in terms of investing: time. Time in the market is important for investors because of compound interest, something Einstein referred to as “the eighth wonder of the world.” Compound interest helps your wealth grow faster because you earn returns on the money you invest and on the returns. Essentially, it is like earning interest on interest, which has a snowball effect on growing your money.
Allows You to Take Risks
When you invest early, you’re able to accept more risk for the possibility of a higher reward. This is because even if the value of your investments goes down, there is still time for the market to recover. For example, you could allocate a higher percentage of your portfolio to riskier investments, such as stocks. Of course, the amount of risk to take also depends on your time horizon, risk tolerance, and for what the funds are earmarked, among other factors.
Time to Learn from Mistakes
When you’re just starting to invest your own money, mistakes can happen. Investing early allows you to get any blunders out of the way while the stakes are still relatively low. Making a mistake with a $10,000 portfolio is much easier to recover from than making a mistake with a $100,000 or $1,000,000 portfolio. It also gives you time to work out any kinks in your investment strategy and streamline your process.
Peace of Mind
There’s more to investing than just the numbers. Knowing you’re on track to meet your financial and life goals can improve your peace of mind and overall mental health. Waiting to invest can cause unnecessary stress and strain your wallet because you’ll need to invest more of your current cashflow to catch up. Combing time with an optimal investing strategy can free up mental space for your current and future self.
How to Start Investing
With the rise of technology and low-cost trading, it’s never been easier to start investing. Everyone’s financial situations are unique which is why investing is not a one-size-fits-all approach. For example, an individual who wants to invest for retirement will need a different mix of investments than someone who wants to invest for a short- or medium-term goal such as buying a home. If you’re not sure where to begin, or need help identifying your goals, we (shamelessly) recommend meeting with a financial advisor.
As a young person getting started with investing, it’s important to utilize tax-advantaged retirement accounts such as your 401(k) or a Roth or traditional Individual Retirement Account (IRA).
If your 401(k) offers a match on your contributions, be sure to invest enough to receive the full match, as that’s free money. Ideally, you want to invest as much as you can in your 401(k), but it’s ok to start small and work your way up over time.
As your assets begin to build, you’ll want to consider contributing both to retirement accounts and brokerage accounts for flexibility. Each type of account can be earmarked for different goals (retirement, home purchase, home repairs, early retirement, and other short- to medium-term goals), making both types of buckets crucial to have for a balanced financial picture.
Final Thoughts
Investing early allows you to take advantage of the power of compounding and take more risks, and you are more likely to achieve your goals. Get started today — your future self will thank you.
Still not sure where to begin with investing? You don’t have to do it alone. Click here to start your investing journey with FSA.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is also available at https://fsainvest.com/disclosures/ or by calling 301-949-7300.
