The right answer to that question is simple: right now. Okay, you might not be ready to invest right this second, but that doesn’t mean that you can’t start planning today. The reason why timing is so important is because of something called compound interest. There is a famous saying that goes: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it”. Since Albert Einstein is arguably one of the greatest minds in human history, his quote might be worth adhering to.
Compound interest is the process of adding interest to the initial investment including interest that’s already been earned. In other words, compound interest allows you to earn interest on interest, and over time this can make a real impact on the returns of your investments. If you’re planning on investing in stocks, they won’t be earning interest per se, but they’ll be earning returns such as dividends and (stock) growth. Then as long as you don’t withdraw what you’ve accumulated, and allow that to be automatically reinvested, you’ll experience compounding returns.
A quick example of this would be as follows: you have $100 in two separate accounts that both offer 10% returns on your investment, and you keep the money in there for 10 years. The only difference is that one account gives you compound interest but one doesn’t. At the end of the 10 years, the account with the compound interest will have $271.79 in it. And the other account? Only $200. Compound interest really makes a difference.
Furthermore, as a young investor you’ll already be ahead of all of those who started investing later than you because you’ll have had a chance to let your money work for you for longer than others have. Young investors also have another advantage, which is safety. Investing funds that are left over after paying bills, etc, allows you to keep a clear head if your positions lose value, as you’ll have plenty of time to wait until the market makes a comeback. Though it is important to remember that one should only invest once they’ve saved up enough money for an emergency saving fund, to reduce risk in case anything goes wrong. All in all, start planning on putting your savings to work now, and you’ll be glad you did in the future. Then 10 years from now when others say that they wished they started investing years ago, you’ll already be ahead of the game. Also, check out our website to access more resources on investing and finances in general.
Written by Robert Sniezko, Financial Wellness Peer Educator, University of Illinois Extension, 2017.
Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.