The importance of investing early is a well-known tenet of investing principles. Almost every investing advice you will hear from veterans will emphasize that you need to invest early and often. 

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But what are the actual benefits of investing early? How much of a difference does it really make if you start investing in your teens or early twenties versus investing in your 30s or 40s? We’ve put together a case by case comparison so you can see for yourself.

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But first, let’s quickly explore the basic concept of investing early and its benefits. 

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The Power of Investing Early: Compound Interest Is the Secret

Compound interest is the driving force behind investments that keep giving and behind every portfolio that gives its owner exponential growth. 

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Compound interest is, in simple terms, interest that you earn on the interest of your investment. In other words, the longer you keep your money invested, the more you start earning, not only from the ROIs of your initial investment, but also on the ROI gained on the ROI earned so far. 

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Compound interest example:

Consider an investment of $10,000 today, with the advantage of compound interest over a 15-year period (meaning you reinvest your earnings to continue earning interest on the interest), at a base interest rate of 5%.

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Investment outcome WITH compound interest:

With an annual compounding interest rate of 5.0% over 15 years, your final investment would amount to approximately $20,789. This demonstrates how compound interest yields a higher return than simple interest.

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Investment outcome WITHOUT compound interest:

In contrast, using the same parameters, simple interest would only yield a final value of approximately $17,500.

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As illustrated, compound interest significantly benefits early investors, as it allows their investment to grow over time to remarkable levels, far exceeding the returns from late-stage investing. This effect becomes even more pronounced over a longer time horizon than 15 years and by adding monthly contributions to the mix.

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By investing early, your money has more time to generate returns. Over time, these returns compound, meaning you earn returns not only on your initial investment but also on the accumulated returns. This compounding effect can substantially enhance your investment portfolio over the long term, potentially leading to significant wealth accumulation.

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Why Is It Important to Start Investing Early? The Benefits of Investing Young

Starting investing early can have numerous benefits that can positively impact your financial future. 

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#1. The Compound Interest Benefit.

Firstly, it allows you to take advantage of the power of compound interest, as we were explaining above. 

#2. A Long Time Horizon

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Secondly, starting investing early provides you with a longer time horizon, which allows you to weather market fluctuations better and to give compound interest more time to work its magic. Markets tend to be volatile in the short term, but historically, they have shown a positive upward trend over longer periods. 

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By starting early, you have more time to recover from market downturns and capitalize on the overall growth of the market. Additionally, it gives you the opportunity to invest in riskier assets with higher growth potential, such as stocks, which generally yield higher returns than more conservative investments like bonds or savings accounts.

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#3. Healthier Financial Habits

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Lastly, starting investing early helps you develop good financial habits and discipline. Investing requires regular contributions, and by starting early, you cultivate a habit of saving and allocating money towards your investments. 

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This discipline, especially if acquired at a young age, can have a positive ripple effect on your overall financial management, encouraging you to make sound financial decisions, save more, and live within your means. 

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By instilling these habits in yourself early on, you set yourself up for a financially secure future and increase your chances of achieving your long-term financial goals.

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Younger investors do face some challenges when it comes to starting investing. Gen Z in particular is just beginning to invest, and this part of finding the right habits and discipline is the hardest to master. 

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But once you set your mind on it, you can achieve a lot, even if you’re just investing $100 a month. Your good investment habit will take you farther than you think. 

Investing Early vs Late: Case Comparison

Here is a numbers-on example of why it’s best to start investing early, as early as possible.

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Let’s take this hypothetical example of Josephine, an investor who starts investing when she’s 25, and Frederik, another investor who starts investing when he’s 35. 

After starting investing early, at 25 years, and with an initial investment of $5,000, Josephine continues her investing journey by adding $3,000 per year. Her portfolio rate is 7.5% ROI, a very good rate for lower-risk investment opportunities.

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Frederik has the same ROI of 7.5% and starts investing a bit later, at 35 years, but he compensates for his later investing start by doubling the starting investment ($10,000 instead of $5,000) and his yearly contributions ($6,000 instead of $3,000), compared to Josephine.

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Still, when both of them are 60 and ready for retirement, Josephine now has a portfolio of $525,599.17, while Frederik’s portfolio is worth only $465,850.57. Even though he invested double as much as her, but starting from his mid-thirties instead of mid-twenties. 

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In conclusion, the mantra of “Invest Early and Often” couldn’t be more true: by starting 10 years earlier, Josephine now has a higher net worth than Frederik, even while investing less than him. 

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That’s the magic of time, patience and compound interest. 

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Wrapping Up on the Importance of Starting Investing Early

In conclusion, starting investing early offers significant advantages, including the power of compounding, a longer time horizon for growth, and the development of healthy financial habits. 

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By taking advantage of these benefits, you can potentially build substantial wealth, weather market fluctuations, and set yourself on a path towards financial security and success. 

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Remember, the key to successful investing is to start as early as possible and remain committed to your investment strategy over the long term.

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That being said, there’s no such thing as a time when it’s ‘too late to start investing’. The perfect age to start investing is right now.

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Investing is always a great idea that will reward you in time, even in the medium term. Start as early as you can and your financial future will be in a much better shape. Good luck!

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