For most people, the time to start investing is now
Over the years I’ve blogged here at the Dough Roller, one question I’ve been asked repeatedly is when should you start investing. To me, the question is very much like asking when you should start eating healthy and working out. If you can fog a mirror, you should be investing.
Now I know the objections to my view will start rolling in–
“I don’t have any money to invest.”
“I have too much debt to save money.”
“I’m too young.”
“I’m too old.”
I’m going to address these objections below. But first, let’s take a practical approach that can easily answer all of the objections below. Betterment (review) is a fairly new company that makes investing a snap. You can start with as little as $25. You select the percentage of your money that goes to stocks and bonds. And Betterment does the rest.
You can set up automatic deposits each month, which is what I do. Anybody can do this. No excuses.
Not convinced? Let’s look at the objections.
Objection #1: I Am too young
This is the craziest of all objections. The most important element of a successful investor is not stock picking, asset allocation, or even expenses. It’s time. The more you have, the more you can earn.
For young people, starting to invest at a young age is always an excellent decision due to the beauty of compounding. The idea behind compound interest is simple: you get paid interest on interest. For example, if you invest $1,000 and make a 10% return in your first year of investment, you’ve got a cool $1,100.
But what happens in year 2?
Well, since you reinvested that entire $1,100 (the original $1,000 + the $100 in interest) at a 10% return, you end year 2 with $1,210. That extra $10 came because you earned 10% on the $100 of interest you earned in year 1.
OK, so that’s only $10 today. Fast forward that $1,000 investment 30 years down the road, and you’ll make far more money off the interest and compounding than you will the original investment.
The following SlideShare presentation does a great job of demonstrating the power of compounding.
Compounding takes a while to start producing true disproportionate results, so that’s why it is the “tool of the young” when it comes to investing. Use this compound interest calculator to input your own financial information and see how much you can have in the future.
Objection #2: I Am too old
So exactly how old is too old to start investing? I’ve talked to folks in their 50s and those in their 70s who think they are too old. Here’s the real issue–they believe there isn’t enough time for investing to make a difference in their lives.
There is a grain of truth in this thinking. The older you are, the shorter your investing horizon. The shorter your investing horizon, the less time you have to let compounding work its magic.
Investing, however, is not just about compounding. Every dollar you can put to work through sound investments can make your retirement that much more comfortable. Investing in your future gives you a sense of accomplishment and hope. As your investments grow, the financial security also gives you a sense of freedom that those living paycheck-to-paycheck don’t enjoy.
When my mom was 45, she considered going back to college to finish her education degree. I recall vividly her concern that she was too old. “Mom,” I told her, “God willing you’ll be fifty in five years. Do you want to be fifty with a college degree or fifty without one?” She finished her degree and today still teaches ESL in Ohio. She’s the oldest teacher in her school district!
Objection #3: I have too much debt
High interest debt is arguably the best reason to defer investing. But before making that decision, there are several things to consider.
First, when people talk about putting off investing to tackle debt, they are talking about consumer debt (credit cards, car loans) and maybe school loans. They are not talking about long term debt like a mortgage.
Second, you need to focus on the interest rate you are paying. If you are stuck with 20% interest on credit cards, it probably does make sense to tackle that debt first. Even better, transfer the debt to 0% credit cards and start investing now.
Finally, you should consider whether you are going into more debt. If you are, then putting off investing until you are debt free may mean never investing. When making investment decisions, it’s important to think of how all of your money works together to make you more money, as opposed to thinking that a certain amount of money “must” be put in the market, or in bonds, or to pay off debt. You can tackle your debt and invest at the same time. That’s what my wife and I did, and we’re so glad we took that approach.
Objection #4: I need an emergency fund first
Yes, you do need an emergency fund. Unfortunately, many Americans have not saved much for a rainy day. One study found that up to 50% of Americans would not have enough cash on hand to cover a $2,000 emergency bill. For those folks, one small slip-up can send their finances into a quick downward spiral.
It’s true that I keep most of my emergency fund in a high yield savings account. But I also keep some of my emergency fund in bond mutual funds. And like paying off debt, there’s no reason you can’t build your savings while you also contribute to a 401(k), IRA or other investment account.
Objection #5: I don’t have enough money to start investing
There’s no minimum amount needed to start investing, and a great approach is to make many small investments over time (called dollar-cost averaging). I’ve tackled this issue before in an article on how to invest with little money. The fact is you can invest with as little as $25 a month.
I started investing $100 a month with Betterment not too long ago. My money is invested in 100% stock ETFs, which I accomplished by literally clicking one button in my Betterment account. Today the account has earned over 10% in the last year and the balance stands at $1,626.91.
You can make a difference in your finances by investing in small amounts.
Objection #6: Investing is too complicated
No it’s not. You can have a completely diversified portfolio by investing in a single Vanguard (Target Retirement Funds) or Fidelity (Target Date Funds) fund. You can diversify through an account with Betterment. It’s not complicated at all.
So what are you waiting for?