5 Reasons Why The Early Bird Catches The Worm When It Comes To Investing

I have long advocated the need for financial education whilst we are younger, even more so now in a modern world where the cost of living is forever increasing and the state pension becomes stretched so far it will  barely make ends meet by the time millennials and Generation Z have chance to draw from it.

Whilst compulsory company pension schemes should be applauded, I still feel that some basic investment knowledge as we leave education and prepare to enter the working world would be highly beneficial.

Having time on your side to grow investments, and making the investment work for you, will help you to live the life you want to lead.

The problem usually lies in how well we understand investing, and if anyone has ever approached the subject with us.

Whether you have a lump sum ready to invest, or would need to make monthly contributions, an investment ISA is a great way to get started.

To see just what you could see in return from your capital placed in an investment ISA there is a great calculator tool you can use here.

So, let’s have a look at three very typical scenarios:

Based on a scenario of three different investors the result in returns can significantly differ. For instance, if you had been investing the maximum annual amount into an investment ISA between 2007/08 and 2016/17 at the start of each tax year, your final pot would stand at £167,121. If you had made monthly contributions over the same period of time your final pot would contain £164,616. However, if you were able to invest the maximum annual contribution, but you left it until the last minute at the end of the tax year, your pot would stand at just £158,551, much less than the other two investors.

So, how would anyone know that without being given the necessary knowledge first?

In short, they wouldn’t!

If you’ve already dipped your toe into investments then give yourself a pat on the back, if not don’t worry, nobody is here to judge you and I must stress it is never too late to start.

Here are five reasons you should start investing as early as possible:

Compound interest

You may have heard of that smart cookie Albert Einstein, known for being one of the world’s great minds? He described compound interest as the “greatest mathematical discovery of all time”.

Now you don’t have to be as intelligent as Einstein to get to grips with compound interest, it’s a simple concept…

When you invest your money you earn interest on your capital. The following year you earn interest on your original capital as well as the interest from the first year. In year three you earn interest on your capital and the first two years interest. And that guys is the miracle of compounding, the concept of earning interest on interest.

Every day that you allow to pass uninvested, you’re missing out on compound returns, or pouring money down the drain as I like to call it.

Making regular investments in an investment portfolio or a retirement account can lead to compounding benefits.

It instills good spending and saving habits

Investing early teaches us important lessons about budgeting, spending, and saving, as well as helping to develop better spending habits.

The earlier on in your life that you develop these good habits the better, and the more you stand to benefit.

If you’re a parent reading this it is prudent to start teaching this to your children as they enter the world of employment to start them off as they mean to go on.

Someone who practices investing early is less likely to be frivolous with their money, and are more likely to avoid issues with debt further down the line and be better at managing their money responsibly throughout their life.

You have time on your side

I’ve said it before and I’ll say it again, time is the biggest commodity we have. And, for someone in their early twenties, your biggest asset is time.

If you are investing in retirement savings, nothing is going to make up for compound interest, plus, if you lose any money in the market, by investing early you have more time to make that money back, before you get to a point that you actually need it.

Win the race with inflation

It is a sad fact of life, but on average inflation decreases the value of your money every year.

If you want to escape the clutches of inflation you need to outpace it by growing your money quicker than it does, and investing is one of the only ways to keep up with it.

You can kick back and enjoy retirement

Look around you, there are going to be a lot people who have a huge shock coming their way when it comes to retirement, simply because they don’t have anywhere near enough savings.

When retirement is waiting in the wings, having no investments could be problematic, however, invest early enough and it could prevent you from making impulse decisions as you approach retirement and are ready to kick back.

Your quality of life will be significantly better as you’ll have a larger pot saved, meaning less stress about making ends meet when the time comes.

Final word

It is easy to fall into the trap of thinking without a large initial sum to invest that it isn’t worth it, it is, and it’s perfectly OK to start small with whatever you can afford to invest today.

Holding off on investing until it is ‘convenient’ is never going to be a good approach, life has a way of throwing us curve balls whatever age we’re at. Always keep in mind that whatever you invest today is likely going to be worth more tomorrow.

Be aware the market WILL go up and down, meaning that sometimes your investment might fall. However, starting early and investing in the long term gives you more time for your investments to mature and make sure that you come out ahead of the game.

What I would stress more than anything is you don’t need to be an expert, or rich, to start investing, so do your research now and take the plunge.

Thinking Thrifty

Thinking Thrifty

David Naylor is the editor of the Thinking Thrifty blog. An award winning personal finance and lifestyle blogger, he shows how it is possible to live extremely well for less.
Thinking Thrifty
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2 thoughts on “5 Reasons Why The Early Bird Catches The Worm When It Comes To Investing

  1. This is a great article and will definitely kick many new savers into beginning their journey, if you are investing in shares I have heard of one way to ensure your investment average remains low so you will do well on any upside, that is invest the same amount irrespective of the up or down nature, if you have £20 to spend and your shares are £4 each then get 5, if they go up to £5 then drop to 4 so you still spend the £20, over time your average will be between the 2 so you will never buy high and sell low, but can wait for a peak and then when it’s above your average close out for a profit.

    Also if you use the rule of 72 you can see how long it will take for your money to double in value when dividing the interest rate into 72. If for example the rate is 6% then it will take 12 years to double.

    Thanks for the great article!
    dennis recently posted…Nationwide setting the trend but will others follow?My Profile

  2. This is a great post. I regularly put any spare cash into a savings account, but I’ve never really put much thought into investing. I’m certainly going to look into it now though – while I may be in my twenties, and retirement is a long way off, it’ll soon be here before I know it and it would be great to be prepared!

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