Warren Buffett made his first investment when he was 11 years old. As he mused years later, “I was wasting my life up until then.”
Unfortunately, most of us won’t have started at that age. And if you didn’t, the good news is that it’s never too late.
But I believe that if you begin when you’re young, you could build up a strong financial foundation, helping you to perhaps reach financial independence a bit sooner than your peers.
If you’re in your 20s, you might be enjoying your freedom. You’ll have probably left university, and are starting to find your way in a career. Life might be busy: new jobs, buying a house, getting married, having children.
With a lot of stuff going on, it’s understandably easy to forget about retirement. This is unwise. Given time, some good decisions, and a bit of luck, your investments could grow throughout your working life.
Let’s look at why people in their 20s should start investing.
Compound interest is a powerful force. Put simply, this is when your investment’s interest compounds on itself.
As an example, your initial investment earns interest. The following year, your initial investment plus last year’s interest earns interest, and so on. With this force at work, your wealth can slowly snowball into something quite significant.
Starting early can make a big difference. If you started investing at 20 years old, putting just £100 per month into your account with 5% returns, at 60 years old you would have £153,238. If you started at 30 years old, with the same 5% return, at 60 you would have £83,573.
Meaning that by waiting 10 years and putting in £12,000 less, the pot will be roughly £69k lighter.
When it comes to money, it’s easy to think of the short term. You might be asking yourself how you will pay for that holiday next year, or purchase a new car.
But with investing, it’s important to have a longer time-frame. What are your life’s ambitions? Retire at 50? Fund your children’s university degree?
There’s no get-rich-quick scheme here. It takes time for compound interest to work its magic.
Perhaps that’s why some people lose interest and withdraw their money. But it’s important to ride it out and remember your goals.
Ignore your peers. It’s easy to get swept up when everything is posted on social media. Copying them could leave you blowing your wage each month, and spiralling into debt.
Look at Warren Buffett. He’s been living in the same house since 1958.
The American billionaire, Arthur L. Williams Jr, has a saying: “it’s not how much you make, it’s how much you save.” You see, frugality is positive to an investor twice over. Firstly, if you’re saving a high percentage of your salary, it allows you to pump more money into your investments.
It also reduces your monthly living costs, meaning you’ll need less money when it comes to retirement, hopefully reaching financial independence that little bit sooner.
When you’re young, investing might sound dull. But later in life, I reckon you’ll be thanking yourself that you started.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.