Why should you learn to invest early? This is because there are several key benefits to investing early, especially when one wishes to ensure their retirement plans reach their objectives. Some of these benefits may not be observed immediately, but in the long-term, the fruits of investing early remain undeniable.
1. Learning to Invest Early Increases the Power of Compounding
The major advantage of investing early hinges on the power of compounding. Compounding is the ability to generate returns from reinvesting previous returns from an investment and this effect becomes more powerful over a long period of time.
Although one could learn to invest in their late 30s or early 40s, it is better for an individual to begin investing as soon as he/she starts working to maximise the power of compounding. Simply put, compounding returns emphasises on the benefit of the time value of money.
Regular investments in long- term portfolios with an expected rate of return over a 10- to 15-year time frame can cause a substantial boost in compounding benefits. Within this group of portfolios, the suitability to a client hinges on his/her risk profile, which could be broadly categorised into “Conservative”, “Moderately conservative”, “Moderate”, “Moderately aggressive” and “Aggressive”.
Usually, a minimum of five years is required for a portfolio to maximise the benefits of compounding. The amount of money put into the first investment also matters because it will benefit from the longer compounding effect on a larger sum of money.
For example, if a 25-year-old Singaporean woman placed $2,000 into her account that earns a 5% return every year, she would have accumulated a total of $2,100 after her first year. The following year would see to a 5% return on the $2,100 of the year before (instead of the original amount of $2,000), thus resulting in $2,205 just after two years. If her retirement fund is able to yield a 5% return every year, she will double the amount of her original investment in less than 15 years. Hence, the power of compounding works wonders over a meaningful period of time.
2. When you Learn to Invest Early, you Will Have More Time for Risks
Over the years, markets have become very volatile and unpredictable over the short-term. However, over the long-run, the time has proven to be a good antidote in helping to both reduce this volatility and increase the predictability of one’s portfolio.
History has proven that capital markets often favour individuals with longer-termed investments. This is because when a person chooses to invest early, despite highly volatile markets, they give themselves sufficient buffer time to recover from any setbacks.
Also, a person who learns to invest early in life may have more opportunities to undertake bigger risks than someone who invests later in life, as the latter tends to be risk-averse since they have a smaller time frame for recovery. Thus, for your retirement plan to stay on track, perhaps it would be best if you begin investing early, especially if you are an avid risk-taker.
3. Investing Early in Life Helps to Cultivate Good Spending Habits
Investing early also helps a person adopt better financial habits. This goes a long way in stabilising his/her retirement plan. The minimum amount of money an individual may invest to have a stable and secure retirement generally depends on the personal financial objectives and time horizon of the individual. A person who wishes to retire early could, for example, consider saving up almost half of his/her monthly salary. In short, discipline is paramount when one wants one’s retirement plan to work.
Ultimately, a person cultivates good financial spending habits when they learn to invest early in life. Ideally, Singaporeans who plan for their financial objectives via disciplined investing from an early age are also more likely to be disciplined in their spending.
Since some of the best retirement plans are crafted based on pre-set parameters (e.g., how much monthly spending can it support; how long will the retirement fund last, etc.), a person lacking proper discipline might stray from these parameters and render his/her retirement plan ineffective.
Therefore, it can be clearly noted that investing early offers several distinct advantages. The primary advantage would be to capitalise on the power of compounding effect, followed by having more time to take on riskier market ventures and lastly, cultivating better financial habits. Together, these three major advantages would most certainly help toward achieving one’s retirement plans.
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Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs.