One of the most compelling reasons to start investing early is the power of compound interest. Compound interest is the interest earned on the initial investment as well as on the accumulated interest. In other words, when you invest, your money can grow exponentially over time.
To illustrate this point, let’s consider two scenarios. In the first scenario, you start investing $500 per month at the age of 25 and continue doing so until you’re 65. Assuming an 8% annual return, your investment would grow to $1,408,256. On the other hand, if you wait until you’re 35 to start investing and invest the same amount of $500 per month until you’re 65, your investment would only grow to $640,794. That’s a difference of almost $767,462, all because of a 10-year delay.
Delaying investing can also mean that you need to save more to achieve your financial goals. As time passes, the amount of savings required to achieve your goals can increase significantly. For example, if you’re saving for retirement and want to retire with $2 million in savings, delaying investing for ten years could mean that you need to save significantly more per month to reach that goal.
Another risk of delaying investing is the impact of inflation on your savings. Inflation is the rate at which prices for goods and services increase over time. While inflation may seem small on an annual basis, it can have a significant impact on your purchasing power over several years.
For instance, let’s assume that the current inflation rate is 3%. If you’re saving money in a savings account with an interest rate of 1%, your purchasing power would decrease over time as the value of your savings is eroded by inflation. In other words, your savings would be worth less in the future than they are today.
By investing, you can potentially earn a higher return on your money than the rate of inflation. This means that your money can grow at a faster rate than the cost of goods and services. As a result, investing can help you maintain and even increase your purchasing power over time.
Another risk of delaying investing is the opportunity cost of missed investment returns. When you delay investing, you’re missing out on potential investment returns that could have been earned if you had invested earlier. This opportunity cost can be substantial, especially when you consider the power of compound interest.
For example, let’s say you delay investing $20,000 for five years. Assuming an 8% annual return, you would miss out on $11,748 in investment returns. That’s money that could have been earned if you had invested earlier.
Perhaps the most significant risk of delaying investing is the potential to not meet your financial goals. Whether you’re saving for a down payment on a house, a child’s education, or retirement, delaying investing can put those goals in jeopardy.
For instance, let’s say you’re saving for retirement and you want to retire with $2 million in savings. Assuming an 8% annual return and a 30-year time horizon, you would need to invest about $2,973 per month to achieve your goal. However, if you delay investing for 10 years, you would need to invest about $7,299 per month to achieve the same goal. That’s a 145% increase in monthly savings required, all because of a 10-year delay.
Investing is an essential part of securing your financial future. Delaying investing can have serious consequences, including missed opportunities for investment returns, the impact of inflation on your savings, and the potential to not meet your financial goals. By starting to invest early, you can take advantage of the power of compound interest and potentially earn higher returns on your money. Remember, time is your greatest asset when it comes to investing, so don’t delay!
If you would like to have a discovery call with Envision Wealth Planning,