Have you ever thought about investing? Most financial professionals recommend it, but with all the different options and strategies, it can feel pretty overwhelming. Not to mention that most investing advice focuses on starting as early as possible — does that mean it’s too late for you to start now?
No. It’s never too late to start investing, and it doesn’t have to be as complicated as it seems. There are several simple investment opportunities that are perfect for beginners. And if you’re thinking that you need to have thousands of dollars in disposable income to invest, that’s another misconception. Even small investments count and help you make progress toward your financial goals.
It’s not too late to start investing
Let’s tackle one of the biggest roadblocks first. There are countless books and articles out there telling you to start investing as early as possible. All those charts showing investment growth rates seem to assume that you start investing when you’re 25 or even younger.
But let’s be real — not everyone has the resources or opportunities to start investing that young. Many people in their twenties are still going to school and/or paying off student loans. They might still be working temporary jobs instead of starting long-term careers. For many younger people, investing just doesn’t seem appealing or feasible.
While there are some advantages of investing early, you’ll get benefits no matter when you start. The best time to start investing is as soon as you can!
Understanding compound interest
So, that’s the real draw of investing? What makes it different from just saving? The answer is compound interest. Basically, that just means that as long as you leave your money invested, you continue earning interest on the entire value of the investment, including previous returns.
Think of it like this. If you invest $100 and earn $5 in interest after a year, that’s a 5% return. You could withdraw your money and be $5 richer. But if you leave that money invested for another year, it’s like starting again, except this time you begin at $105. At that same 5% interest rate, you’ll end up with $110.25 after a year. And then a 5% return on $110.25 yields $115.76, and so forth. Compound interest is exponential — it’s like increasing your investment without actually contributing anything more than the first $100 you put it.
Now think about how powerful compound interest is with a bigger investment over a long period of time. You can use an interest calculator to see just how much you can earn through compound interest. For example, if you invest $1,000 at a 3% interest rate that compounds annually and you wait for 20 years, you’ll end up with $1,806.11! You’ll earn over $800 just from compound interest.
Now, if you start with that same initial investment and annually compounding interest rate but also contribute $20 every month, you’ll have $8,255.00 after 20 years!
Bottom line: compound interest is extremely powerful, and you can benefit from it even with a small initial investment.
Choosing the right amount of risk
The final thing to consider when you’re starting to invest is risk. Every type of investment carries some level of risk. Interest rates and stock values are subject to change, so there’s always a chance that your investment could lose value instead.
Generally, the risk correlates with reward. In other words, the higher the potential return on your investment, the larger the risk of a potential loss. For example, stocks tend to be higher risk than government bonds — but they can also offer a larger potential return. That’s why most financial professionals recommend having an investment portfolio that includes different types of investments. A diversified portfolio allows you to balance potential risks and rewards.
The idea of losing the money you invest sounds scary, but there’s another side to this coin — historically, most investments (including stocks) gain value over time. Market dips eventually resolve, and investments start growing again.
So it’s generally best to develop a long-term plan for investing. The plan isn’t to try to get a high return on your investment after a year or even five. In most cases, it’s best to leave your money invested for as long as possible.
What are some good beginner investments? Here are some suggestions:
- A high-yield savings account
- Your employer’s 401(k) plan
- Certificates of deposit
- Mutual funds
- Government savings bonds
- Individual stocks
If you want more advice, consider working with a financial planner.
Ready to invest?
No matter how old you are or how much money you have, you can benefit from investing. It’s never too late to start, and even small investments will grow over time.
If you’re ready to start investing, determine how much risk you’re comfortable with, and choose assets that fit those parameters. And remember to update your budget so it accounts for the money you’re putting into investments.
Not sure how much room you have in your budget for investing? Can’t remember the last time you even looked at your budget? Never even had one in the first place? Don’t worry — just like investing, it’s never too late to start budgeting either.
Check out BudgetingBlocks™, our hands-on system that eliminates boring spreadsheets and stressful apps in favor of honest conversations and fun, game-inspired props. You’ll be ready to budget for investments in no time! Find out more about BudgetingBlocks™.