Younger people have one of the biggest investing edges of all.
If you’re relatively young, you might not be giving too much thought to saving and investing, and you might not be thinking much about your retirement, either. It makes sense: After all, you’re probably relatively early in your career and you may not be making nearly as much as you expect to in the future. And if you’re, say, 30, it can be hard to imagine being 60.
But there are some powerful reasons to start learning and investing sooner rather than later. For one thing, you have a huge advantage over many other investors right now. Also, if you turn out to be really good at saving and investing, you might get to retire early — well before age 60 or 65 or 70; you might retire at 45 or 50 or 55!
1. Start investing early
Your big advantage over millions of other investors is time. A 50-year-old may be earning more than you (though perhaps not!), but they only have 10 or 20 years or so until retirement. If you’re 30, you have 30 or 40 years in which your invested dollars can grow. Your earliest invested dollars are your most powerful ones.
Imagine, for example, that you start saving and investing in earnest for retirement at age 45, hoping to retire at age 65. If you sock away $7,000 per year for those 20 years and your money grows at 8%, you’ll end up with around $346,000. If you started investing that $7,000 annually at age 35, though, giving your money 10 more years in which to grow, you’d end up with around $856,000 — more than twice as much.
You can probably end up with one or more million dollars if you can invest larger and larger sums as you earn more in your working life. The sooner you start investing, even with somewhat small sums, the sooner those dollars can start growing for you.
2. Invest effectively
The stock market’s average annual return has been close to 10% over long periods, though it’s likely to be greater or less than that during your particular investing period. If you’re investing for your retirement with certificates of deposit (CDs) that are offering 4% interest rates, you’re not going to grow your wealth very quickly. Bonds aren’t the best long-term wealth builders, either.
Wharton Business School professor Jeremy Siegel has made a great case for stocks, finding that stocks outperformed bonds in 85% of all 10-year holding periods between 1871 and 2021 and in 99% of all 20-year holding periods.
Focusing your long-term money on stocks is best for most people, and you can do so easily by opting for one or more low-fee, broad-market index funds, such as the SPDR S&P 500 ETF (NYSEMKT: SPY), Vanguard Total Stock Market ETF (NYSEMKT: VTI), and Vanguard Total World Stock ETF (NYSEMKT: VT). Respectively, they’ll have you invested in most of the U.S. market, all of the U.S. market, or most of the world’s stock market.
If you want to aim for market-beating returns, you might opt to add some growth stocks to your mix. Growth stocks belong to companies growing at faster-than-average rates. They can be more volatile and risky than average stocks, but they also have the potential to increase in value at a faster-than-average rate. (Dividend-paying stocks can also be powerful growers, offering regular payments during good times and bad, with those payouts often increasing over time.)
If you’re going to invest in individual stocks, don’t put too much in too few of them. Our Motley Fool investing philosophy suggests buying 25 or more stocks while aiming to hold them for at least five years.
3. Invest regularly
Finally, be diligent. Save and invest regularly, year in and year out — for decades, if you can. The more you save and invest, and the earlier you start, the more wealth you can amass.
It can be easy to give up if the market or your particular stocks don’t surge soon after you invest, but trust the process. The market will go up and down over time, but over the long run, it has always gone up. Review that table up top, and you’ll see that the really big bucks arrive after you’ve been saving and investing regularly for a decade or three. This kind of diligence has the power to get you an early — or at least earlier — retirement.