Why you should start investing in your 20’s
On your path to mastering wealth and achieving financial independence, one of the greatest skills you will need to master is the art of saving and investing. It’s common knowledge that the earlier you start something, the sooner you will be able to master it.
Take sport for example, the earlier in life you start practicing that sport, the better you are going to be at it. Just look at your favorite footballer, Olympic medalist or martial arts fighter – they all started at a young age to master their sport, and the same principle applies to your finances and investing.
If you’re not quite sure what we mean by investing yet, check out our previous post on What is Investing? Otherwise, read on below to learn why investing in your 20’s could be the best decision you ever make.
The magic of compounding
Perhaps THE biggest reason to start investing in your 20’s (or as soon as possible if you’ve passed the big 3-0) is to benefit from the compounding of investment returns.
Compounding was described by Albert Einstein as the ‘eighth wonder of the world’ and Warren Buffett, the godfather of investing is frequently quoted placing his success on ‘playing the long game’ and ‘compound interest’.
“the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.Albert Einstein
Over his 52-year stint as CEO of Berkshire Hathaway, Buffett has earned nearly a two million percent return on his investors’ money. To put that into perspective, if you invested $10,000 into Berkshire Hathaway in 1965, that investment would be worth over $88 million today.
Despite being the key to wealth creation, compounding is actually a fairly simple concept. Compound interest is often referred to as ‘interest on interest’ and simply refers to earning interest or returns on previously earned interest.
In other words, when you receive interest, rather than taking that money out and spending it, you leave it to earn more interest, or leave it to be invested to earn more investment returns.
While you are no doubt thinking this sounds too simple to be the key to mastering wealth, let’s look at the power of compounding with an example.
Let’s say you have £100 per month to invest, or £1200 over a year (a fairly modest amount – most of which you could save by skipping the Cappuccino from Starbucks each morning ☕).
You invest this money into a robo-wealth investment portfolio like Wealthify or Nutmeg or into a fund such as a FTSE 100 Tracker (which invests in the top 100 FTSE companies) through a platform like Hargreaves Lansdown. While investment returns will fluctuate year on year, when considered over a longer time period such as 10 years, an investment like this has historically averaged a 7% return per year.
Investing your £1200 at 7% will yield £84 each year.
Now, you could spend this £84 and just invest your £1200 again for another £84 next year, or you could invest your £1200 + 84 for a total of £1284 at 7%.
This re-investment of a larger amount will now yield £90, instead of just £84.
Doing this time and time again is what compounding as all about, and if we look at this over a longer time period with frequent saving and investing, we can see how much power compounding really has.
The table below shows a total of £37,200 invested over 30 years. With compounding of the 7% return each year, this results in a balance of £131,062 and that was all from just £100 per month.
Save and invest £1000 per month, and with the same 7% return you’ll have over £1.2m at the end of the 30 years.
Hopefully now you can see just how powerful compounding really is and of course, the more you can save and invest and the earlier you save and invest, the greater your final sum and the more time it has to grow, and that right there, is the reason you should start investing in your 20’s (or as soon as possible).
Now all you need to do is start managing your finances to save money each month and then start investing that money into an investment that gives you compounding returns.
If you have any questions or suggestions on what you’d like to see from us here at The Money Plug, leave a comment in the comments below!
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