By Lisa Bigelow
When you’re fresh out of college and about to start your career, saving for retirement often takes a back seat to financial priorities like building an emergency fund or saving to buy a home. But it turns out that the easiest way to win financial comfort in your older years is to start investing young.
Millennials may have mastered best practices for remote working during covid but they’re not innovating when it comes to investing, according to the Wall Street Journal. In fact, millennials aren’t aggressive enough – often stashing savings in cash or low-risk (but low-return) bonds.
What millennials fail to realize is that starting early means they can invest more aggressively with smaller contributions and still wind up with more savings later on, even if they suffer losses along the way.
The biggest mistake, frankly, is not investing at all. Here are five reasons why.
1. Compounding interest is magic
It isn’t often that the federal government calls an investment strategy “magic,” but that’s exactly the word used by the U.S. Securities and Exchange Commission to describe the power of compound interest.
Money guru Suze Orman agrees, telling CNBC that a twentysomething investing $100 per month who averages a 12% return will have over one million dollars saved by age 65. But the same twentysomething who waits until their thirties to invest will only have about $300,000 saved, losing out on 10 years of compound interest and an astonishing $700,000.
The message could not be clearer: investing smaller amounts earlier on leads to bigger savings balances later.
2. Aggressive investing often returns bigger profits
Aggressive investing is more likely to lead to bigger returns – but also the occasional loss. Remember, even the smartest investors occasionally lose, so start your investment career by understanding that nobody wins 100% of the time.
Don’t overlook interesting opportunities such as Bitcoin just because you’re concerned you may lose some of your principal. Now is the time to take bigger risks with your investments simply because you have more time to recover financially if you take a loss.
3. Learning now makes life easier later
Think of learning how to invest like going to college or deciding on a career. You probably spent a lot of time evaluating your options and considering your budget and scholarship opportunities, ultimately designing a path that played to your strengths.
Did this take time and effort? Sure. But you’re probably glad you did. Learning how to invest early is the same idea. The good news is that learning doesn’t have to be hard (or even time-consuming). And when you know what you’re doing later – especially when you may have kids and a mortgage to worry about – a fat and growing nest egg will be one less thing to worry about.
4. Your options will be more fun
At some point, you’ll be in your forties or fifties. You’ll probably be earning more income. You’ll want to kick back and relax with your family instead of stressing about retirement. When you have a healthy balance in your IRA or 401(k), you can consider investing in assets you can enjoy that will also pay you back at the same time.
For example, let’s say you want to buy a second home at your favorite ski resort or seaside enclave. You can maintain your small monthly retirement contribution and enjoy the benefits of compound interest while also using your bigger income to purchase a vacation rental property.
Although the monthly rent you charge may only cover the mortgage, taxes, and maintenance costs, it won’t be long until that rent pays off that mortgage. And that means you’ve just let someone else pay for your vacation home for you.
5. Peace of mind is priceless
It’s pretty clear that investing early more easily leads to healthier finances later. When you don’t have to spend hundreds of dollars every month making catch-up contributions to your retirement account you can enjoy peace of mind by discovering a great hobby, traveling, or focusing on your family, friends, and other interests.
But what you won’t have to do is worry about money.
About the Author
Lisa Bigelow writes for WiseGeek and is an award-winning content creator, personal finance expert, and mom of three fantastic almost-adults. Lisa has contributed to MagnifyMoney, FinanceBuzz, Life and Money by Citi, Well + Good, Smarter With Gartner, and Popular Science. She lives with her family in Connecticut.