A 20 year old might be thinking about investing but may wonder – am I too young to invest?
On the contrary, a 50 year old may think it’s too late for me, there is no point to start investing.
So then is there a right or wrong age to start investing? What is the best age to start investing?
If you have money to invest, the best age to start investing is to start as soon as possible.
The reason for this is that the power of compounding takes years to grow your investments.
The sooner you start investing, the sooner your wealth grows and the sooner you can retire.
Even if you start investing later in life, that is ok, it’s better to start now and let it compound.
In this blog article, I talk about the power of compounding: what this means and how it works.
I’ll also give some real life examples of 2 people investing and what that looks like over time.
Finally, I explain why it’s not too late to start investing and where to go for more information.
How Compounding Works
When we talk about compounding, we’re actually referring to principle of compound interest.
Compound interest is when the interest earned on your investments earns interest on itself.
Sounds confusing right? It’s actually really simple: Einstein calls it the 8th wonder of the world.
As the interest grows, it begins accumulating more rapidly and grows at an exponential scale.
I can try to describe it all I want, but the best way to explain it is by giving an actual example:
Imagine you contribute £1,000 per year to an investment account that earns you 8% annually.
After year 1, the balance is now £1,080. In year 2, you add another £1,000 and earn 8% again.
This time you earn interest not only on your contributions, but on your interest from year 1.
In year 2 the starting balance is £1,080 plus your £1,000 contribution for Year 2 equals £2,080.
Therefore the interest you earn for year 2 is £166.40, giving you a new balance of £2,246.40.
The Power of Compounding
To make sure that you really understand how compounding works, let’s take a look at Year 3:
Your opening value is £2,246.40 (from the end of Year 2) and you contribute another £1,000.
This gives you a balance of £3,246.40 which will be used to determine your 8% annual return.
This gives you £259.71 (8% of £3,246.40) which gives you an end of year balance of £3,506.11.
See the contributions are the same but interest increases? That’s the power of compounding!
In the early years of investing, it will seem that you’re only earning a small amount of interest.
But give it time – with each passing year, your compounding interest will grow exponentially.
It will one day surpass your contribution value and be responsible for your investment growth.
The graph above is continuation of the example if we were to keep investing over 40 years.
As you can see, the interest earned quickly passes the contributions and continues growing.
Two Investors: Ellie vs Larry
That’s all great, but still doesn’t answer the question: what is the best age to start investing?
The best way to answer this is to look at the investment profile of 2 people: Ellie and Larry.
At 20 years old, Ellie starts investing £100 a month for 10 years, investing a total of £12,000.
The rate of return doesn’t really matter in this example but let’s assume that it’s 8% annually.
You might think it weird for Ellie to stop investing after 10 years – we’ll see the effect this has.
Larry on the other hand also invests £100 per month, but is different from Ellie in two ways:
He invests 10 years after Ellie (at 30 years old), and invests for 30 years instead of 10 years.
Larry seems more typical of when most people start investing and how long they invest for.
Ellie on the other hand is quite rare in terms of starting age and the length of their investing.
But the question is: who’s investment account is better off by the time they reach 60 years?
At 60, Who has More?
Before discussing the results, it would be reasonable to make the following assumptions.
You would think that starting just 10 years after Ellie wouldn’t make much of a difference.
It would also be reasonable to assume that contributing 3x more than Ellie would be better.
Keep in mind they are both investing the same monthly amount and have the same returns.
However from the graph above, it seems these assumptions could not be further from reality.
The first observation is that at age 60, Ellie stampedes over Larry by a staggering £143,602!
That is an incredible difference, considering Ellie invested 3x less than Larry over the years.
Therefore the only explanation as to why Ellie wins is that she started investing 10 years early.
The conclusion is this: the earlier you invest, the earlier your investments start compounding.
If you started early like Ellie, but contributed as much as Larry, you would be even better off!
It is Never too Late
You might be reading this at 40 or 50 years and thinking that’s it, it is too late to start investing.
Let me tell you: no matter what age you currently are, it is never too late to start investing.
Even if you are 40, 50, etc. you have plenty of time for your investments to start compounding.
Ellie and Larry are better off than Nigel – who never invested because he thought it is too late.
Investing is to give you and your family a better retirement so the sooner you start, the better!
If you want to play around with compound interest, check out: Compound Interest Calculator.
Just plug in the numbers for your investments, follow the instructions, and discuss the results.
Are you currently investing? If so how is it going? Please let me know in the comments below.
If you enjoyed this blog article, check out my other articles on investing and early retirement.
If there are any other investing topics you would like to discuss let me know in the comments!
