When Is the Right Time to Start Investing?
Okay, you probably know investing is a key part of growing your wealth. (If you want to learn more about investing, including how to get started, we have you covered.)
But but when exactly is the right time to start investing?
Long story short, the sooner you start, the better
Alright, sort of a cop-out answer, but it’s true. The sooner you can get started investing, the better. And while we can’t speak to your specific financial circumstances, there are a few compelling reasons to get started ASAP. So let’s go over the big ones.
• To take advantage of compounding
When you invest, your money earns a return (hopefully!). Meaning your money earns more money for you. And that money earns even more money for you… The process is called compounding, and over time, the effects of compounding can add up to a lot of money. For example, $100 compounding at 7% a year would be worth almost $200 in ten years, almost $400 in twenty years, and more than $750 in 30 years. So in a way, time does equal money.
• To protect against inflation
Inflation is another big concern when it comes to managing your finances. Over time, as more and more money/credit enter the financial system, the value of a dollar decreases. The change isn’t really noticeable from one day to the next, but again, it adds up over time. Money sitting in a checking account or savings account will almost never keep up with inflation. Which means the value of your money will decrease over time. But when you invest in stocks, bonds, and other financial assets, you’ll have a much better chance of keeping up with/outpacing inflation.
• To build good habits
Ultimately your financial success comes down to your behavior. You may know what should be doing, but if you don’t actually do it, it won’t matter much. So the sooner you start developing good habits, like regularly setting aside money for the future, the better off you’ll be. So if you start investing early, even with a small amount of money, you’ll start developing those good habits that much sooner.
Retirement accounts can be a great place to start
Yes retirement. Sure, it may be a long way off (sorry YOLOers). But certain accounts designed specifically for retirement savings can be a great place to start investing.
This includes accounts like a 401(k) (offered through your employer) and an IRA (done on your own, outside of work). Both of these accounts offer a tax-advantage that allows your money to grow faster than it would otherwise in a more basic taxable account.
Also, if you’re employer does offer a 401(k) plan, they may even offer a match, meaning they’ll contribute money in addition to what you put in. It’s about as close to free money as you can get. Yes, there will be some rules around the matching, like the maximum amount your employer will contribute each year and how long it takes to vest (you may not own the matched money right away). But overall, it can be a great incentive to start investing.
► Learn more about 401(k)s
► Learn more about IRAs
But shouldn’t I wait until I can “buy low”?
It’s true the stock market has gone up a lot in recent years. And it’s a tempting idea to try to “time the market” and get in when it’s down. But research has shown that it’s virtually impossible to do so successfully (even for professional investors).
A more realistic approach is to regularly set aside some money from your paycheck for your investments. The market will always have its ups and downs. So sometimes you’ll be buying at market highs and sometimes at market lows. But your systematic purchases should cancel out the fluctuations to some extent, and stocks tend to go up over time.
What if I have a large sum of money I want to invest?
If you already have a large amount of money sitting in a checking or savings account that you want to invest, you may want to consider dollar cost averaging.
When you dollar cost average, you divide your money into smaller amounts and invest them at regular intervals. This way, you’ll avoid investing a large amount of money at a market top, and you’ll also avoid the anxiety that comes with seeing your investment drop (even if it’s temporary).
But one caveat. If you go purely by the math, you’re probably better off investing your money right away. That’s because mathematically speaking, stocks are expected to rise over time. And the more time you have, the better. But on the other hand, the psychological side of money is real. The last thing you want to do is invest a large sum of money then watch the market immediately dip. You might be tempted to sell, only to see markets rebound later. It’s the kind of financial trauma that can shake your investing confidence for years to come. So dollar cost averaging can help you reduce the mental anguish that comes with seeing large amounts of money fluctuate in value. Which in turn can help you stay on track for the longer term.
What if I have other financial priorities?
Right, we know everyone’s situation is a little different. If you’ll be needing the money in the next few years, you probably don’t want to invest it in stocks or certain types of bonds because the value of these can drop in the near term, sometimes significantly. We’re typically talking long-term goals here, like retirement, to give your investments decades to grow.
Furthermore, if you have high interest debt, like credit card debt, you should prioritize that ahead of investments and pay it down as quickly as possible since the interest rate will likely exceed the return you can earn on your investments. Also, be sure you have at least some money set aside for emergencies. You don’t necessarily need a fully funded emergency fund before you start investing, but you want to have something on hand for rainy days.
Ultimately you’ll need a money strategy that’s right for you. But in general, the sooner you start investing, the better off you’ll be.
Anything else we can help you with?
► How to automate your finances to save more
