Most investors’ ultimate aim is to achieve financial independence, but very few can claim they have reached this. This is because investors often leave it late in their life to begin investing. When they can no longer afford it the time it needs to truly work its magic. If only they started when they were a bit younger…
Below I have stated the 6 reasons why starting to invest as early as possible is key to achieving your financial independence.
1. It’s not only for the rich
First, lets debunk one of the huge myths surrounding investing. Historically investing has only been available to investors who have a large pile of cash.
In the modern day this is false, anyone can start investing no matter the amount you have. Online brokers like eToro, TD Ameritrade, Hargreaves Lansdown etc. all have very small minimum deposits.
This means that you can start right now with just £50 or less.
2. Fewer financial responsibilities
The point here is that with youth comes a lot of financial freedom. You are not tied down with credit card repayments, or the costs of having children, possibly not even mortgage or rent payments. Most of your earnings go straight into your pocket.
You may not know it, but you are in a far better position to save and invest than you think.
3. You can accept more risk
With time on your side a lot of extra options are open to you. If you only had 10 years till your retirement your investment opportunities are limited, you’d have to choose very stable investments that will provide you with a reliable return.
However, with plenty of years till retirement all the doors are open. You can choose to make high risk high return investments knowing that if you lose money you have a long time to make it back.
4. It can help you make smart financial decisions
Once you start investing you become a lot more involved in your financial future and planning for that future. You’ll take far more notice of what’s going on with your money and what benefits are available to you.
To be able to invest you will need to get into the habit of saving money. This is a brilliant habit to have, especially if it moves you away from a dangerous spending habit.
5. Compound interest!
Perhaps the most significant and exciting point on this list, compounding is the main reason that getting in early is important. Time is everything when you’re compounding.
The example below should show you the advantage that starting early can give you. (Below we assume a retiring age of 70 and a return on investment of 10% per annum).
Investor A doesn’t start thinking about their retirement till they are 40. From there on they begin saving £2,000 a year until they are 70.
Investor B saves and invests £1,000 a year from when they’re 20 till they are 40.
In total investor A has put £60,000 aside, whereas investor B only £20,000.
However, when they reach 70, investor A ends up with just under £400,000. Yet investor B ends up with over £1.2 million. That’s an impressive amount to retire on. All from saving just £1,000 a year. The main factor is the length of time that the money has spent compounding its returns.
As Ben Franklin states quite eloquently , “Money makes money. And the money that money makes, makes more money.”
6. It will help you achieve financial independence
If like investor B you have started early, you’ll end up with a nicely sized retirement pot. The best thing about this pot is that each year you get a 10% return from it. This return can be taken as your income.
With investor B’s total assets at 70, the 10% return will be £120,000 per year. That speaks for itself. This will allow you to become financially self-sufficient. You will have reached financial independence.
Right now, is the best time to start. No matter your current age. The earlier you start the better, and the earliest you can start is right now.
Thanks for reading, see you in the next post.