Here’s How Investing in Your 20s Can Save You $50 0000+
Okay, so: I’ve laid out the situations in which it’s better not to invest. If you’re in one of those situations, I totally commend your wisdom in not jumping on the investing train.
But let’s say you’re not in any of those situations. You just don’t see the point of taking a few hundred dollars out of your paycheque and putting it into an account that you won’t touch for forty years.
I get it. Especially when you’ve barely achieved any financial goals, it seems strange to prioritize the one that’s the furthest away.
You might be thinking that you’ll have a better job in a couple of years, and it will be easier for you to start investing then. Maybe you’re waiting for a raise. Or you want to buy a new car first.
But here’s the thing: there will never be a time when you have only one financial concern. Even when you decide to focus on one, there’s always something coming up next. It’s unsustainable to press pause on the rest of your life in favour of one goal at a time. I mean, you gotta live!
One of the keys to having good financial habits is getting used to allocating your money towards different things at once. To get even more specific, it’s working towards both short-term and long-term goals, while maintaining your day-to-day living.
Even though this might seem like a headache, it actually takes less effort to add investing to your current financial plan than it does to start investing later in life. Here’s why.
First of all, it’s virtually impossible to simply save enough for retirement. Let’s say you retire at 65 and live to 100. This means that in your 40-odd years of working, you’ll need to save for 35 additional years of living expenses. It’s pretty hard to make those numbers work.
You need your hard-earned money to work just as hard as you do for you. This is why I’m such a big fan of investing. It’s a way for us to make money without doing any of the heavy lifting.
Now it’s time for what you came for:
how investing early can save you tens of thousands of dollars
We’re going to look at a few different scenarios in which someone’s retirement goal is to have approximately 1 million dollars by age 65. We’re assuming a 10% rate of return from investments, which is pretty standard for index funds. We’re also assuming that this person makes monthly deposits into an investment account.
The 25-Year-Old Investor
In the image above, someone starts investing at age 25. To reach their goal of one million dollars, they have to contribute about $172 per month. Over 40 years, this is a total personal contribution of $82 560.
Meanwhile, the growth — the money that accumulates through interest — is a massive $922 301.
This 25-year-old will work for 8% of the money that they will have accumulated by 65. The other 92% is the result of their money working for them. It’s compound interest at its finest.
The 35-Year-Old Investor
In the next scenario, our investor decides to start at age 35. To reach their million dollar goal, they have to contribute $465 a month, which is almost 3 times as much per month as the person who starts at age 25.
Now, by age 65, $167 400 will be the money they worked for, while $842 264 will be the result of money that worked for them. This is a 17/83 split, which means that the vast majority is still growth.
However, the difference in personal contributions between this scenario and the 25-year-old investor is $84 840. This means that over their life time, the 35-year-old has $84 840 less to spend on other financial goals — like a house, vacations, or their kids’ education.
The 45-Year-Old Investor
Now let’s look at someone who starts investing for retirement at age 45. This might be an unlikely scenario, since most people do start before then, but it’s not impossible.
The first thing I want to draw your attention to is how much the 45-year-old will have to contribute monthly: $1325. This is 7 times more per month than the person who starts investing at age 25, and it’s almost 3 times as much as the person who starts investing at 35.
The next number I want you to look at is the split between the money they worked for and the money that worked for them. The numbers are now 1/3 personal contributions and 2/3 growth. Again, this still means that their money is working for them, but not nearly as much.
Over 20 years, the 45-year-old has to devote more than $300 000 of their own money towards their investments to achieve the million dollar goal. This is compared to $82 560 for the 25-year-old, and $167 400 for the 35-year-old.
It’s important to note that unless this 45-year-old makes a six figure salary, it will be so challenging to take this kind of money out of their paycheques. This whole scenario is difficult, and while people in this situation exist and manage to figure something out, there’s no reason to get into this scenario when you have an opportunity to invest in your 20s.
Investing younger and for longer means investing less
You might have thought that starting to invest at a younger age meant that you’d be putting more into your investments. But the opposite is true!
If you start investing for retirement at age 25, you can make $1M out of less than $100K, leaving you with tens of thousands to play with over your lifetime.
This is why starting young and making small contributions over decades is what gives you the most financial freedom!
Of course, I can’t promise that that these exact numbers will work out for you because we can’t entirely predict the performance of the stock market. However, what I want you to realize is the difference that time can make in allowing you to get the most out of your money.
No matter how old you currently are, the sooner you start investing, the better!