Why is it Important to Start Investing Early?
Updated: Jan 14
Avoid getting left behind.
*Not financial advice - your money, your choice.*
When I ask people why they don’t invest, I often get the same answers:
It seems too risky
I don’t want to lose money
I don’t know enough to feel comfortable (click here if you're starting from square 0)
I don’t know how to open an account
I don’t know what to invest in
When I ask someone ‘Why don’t you invest?’ they often reply ‘It seems too risky.’ I can immediately tell they don't have enough knowledge to know that it’s riskier to keep money in cash - which is OK! I’m here to explain.
When we think about risk and the value of money in the long term, we also have to be mindful of how much we are losing/risking by not investing.
When we have money sitting in a checking or savings account, (usually earning only 0.01% interest) it loses 2-3% per year due to inflation.
Quick Example:
Bill puts $1,000/mo into his checking account, over 30 years he’ll end up with about $250,000, adjusting for inflation.
If we assume Kathy the same amount every year at a 6.5% annual return (9% - 2.5% to adjust for inflation), she’ll have just over $1,000,000 by the end of the same 30 years.
Chart created by BenjaminsWithBen.com
Going Deeper:
Risk is another term that had me confused when I first started, namely, how do I quantify it and what is my risk tolerance?
Risk is the chance that something will lose value. High-risk investments typically also have higher potential upsides and downsides whereas low-risk investments are the opposite.
Depending on your goals and age, your risk tolerance may be different.
For example:
If you have a family you need to provide for, it may be better to opt for a lower-risk approach. The same applies if most of your wages go to cost of living and food expenses.
If you're young and single, you may have a higher risk tolerance which could mean investing in individual stocks, 3x levered ETFs (if the ETF goes up $10 the 3x ETF goes up $30, and the same with going down), or crypto. Don't know what an ETF is? Click here.
Diversification can be a way to reduce risk. Investing in just 1 company can be profoundly risky. If the company has a bad year and you have a large surprise expense like a huge medical bill then you may be forced to sell and realize those losses.
Diversifying into a variety of different industries through an ETF or owning different companies in different sectors can help reduce risk.
Realizing a gain and realizing a loss can be tricky terms to understand:
When you sell a security like a stock or ETF for more than what you bought it for, the difference is considered a 'realized capital gain'.
IF you sell it for less than the amount you bought it for then it is a 'realized capital loss'.
Any changes that happen before you sell are known as ‘unrealized’ gains or losses.
Volatility is also something that took me a bit to understand... volatility is a measure of how fast stock/asset prices are changing and describes how widely an asset's price has changed over time.
In most cases, higher volatility also equals higher risk.
Investing for the long term tends to minimize the impact of short-term volatility and can better help you to have positive results. If you don't have any money to invest or don't know how much to invest, click here.
If you found this helpful, consider subscribing to my YouTube channel, or newsletter, or follow me on social! If you have any comments please leave them on this post - I love hearing what you have to say + if there’s anything you want to be covered next!
Click here to go back to the home page and check out different posts.
Comments