A few years ago, the word investing might have sparked thoughts of middle-aged men in pinstripe suits buying and selling, we wouldn’t judge if your mind went straight to Leonardo DiCaprio dressed as Jordan Belfort from Wolf of Wall Street. However, in recent years, due to advancements in technology, the emergence of cryptocurrency and the pandemic bringing many people’s prospects of financial security to a halt, investing is on the up. In this article, we’re going to talk about why investing young can set you up for life.
A survey from June 2020 showed us that 75% of Gen Z and Millennials are planning to invest. The rise of investment apps has made it much more accessible and interesting and has made the younger generations ‘more likely to invest’.
Why should I be investing young?
Investing young means you have time on your side, we love the saying ‘time in the market is better than timing the market’. It also means you can instil better financial habits and prioritise your future when it comes to financial wellbeing. Whilst investing is inherently risky, investing before you have big financial responsibilities such as a mortgage, children and other expenses means you have a little less to think about when it comes to risk.
The most important benefit of investing young is compound interest (insert heart eyes emoji here).
What is compound interest?
Essentially, compound interest is free money. Seriously! It’s where the interest you earn on investments is reinvested, earning you more interest. Compound interest accelerates the growth of your investments over time. It’s your money making more money!
Let’s put this into perspective. So, Elle and Jenna are best friends. Elle starts investing at the age of 19 and decides to invest £2000 annually that earns her 12% in compound interest each year. When she turns 26, Elle stops putting money into her investments and has invested £16,000 over 8 years.
Jenna decides to start investing at the age of 27. Like Elle, she puts £2000 a year in her investment funds that earn her an annual interest of 12%, but Jenna doesn’t stop investing and continues until she is 65.
So, Jenna invests £78,000 over 38 years, while Elle invests a total of £16,000 over 8 years. Who do you think ended up with a larger portfolio by the time they were both 65?
At 65, Elle has accumulated £2,288,996 and Jenna has accumulated a total of £1,532,166. The reason Elle has so much more is that she started investing young and benefitted from the beauty that is compound interest.
If we have anything to learn from Elle and Jenna, it’s to start investing as early as possible to reap the benefits of compound interest.
Keep this in mind
Whilst this article might have you downloading all the investment apps out there, it’s important for you to be aware of your circumstances and invest responsibly. No matter your age, if you have any consumer debt such as credit card debt, it may be helpful for you to tackle that first before putting any money into investments. In the Financielle Playbook, we also recommend building up an emergency fund before investing in case of any unexpected bills. It’s also important to remember that investing does not guarantee your money to go up, you are always at risk of getting back less than you originally put in.
However, it is important to not overthink it – as this can mean you take no action at all and the longer you put it off, the less likely you are to be Elle.