The Importance of Starting Early with Investing

[dropcap background=”” color=”” circle=”0″]T[/dropcap]here are a number of factors that go into successful personal investing—things like coming up with a plan, keeping it simple, writing it down, etc. However, no factor may play quite as large a role as timing. The sooner you begin putting money aside, the longer it can work for you.

Compounding Interest

Though you’ve heard it said a million times before, time really is money when it comes to compounding interest. This is the process of earning money on an investment’s earnings. The more time you give them, then, the more time you have to reinvest the interest and see returns from it.

Simply put, compounding interest is the only surefire way for the average person to see actual riches. It may take as long as 30 years, but it’s possible with compounding interest.

Finding Your Investing Horizons

Depending on when you start and what your goals are, though, you might find you have more than 30 years available for compounding interest to work in your favor. It’s all about knowing how long your investment horizon is.

Fortunately, it’s very easy to figure this number out. Start with your current age and then estimate by when you want to be financially independent. The difference is your investment horizon. This is the timeline against which you need to manage your money.

This is why I frown on short-term thinking when it comes to your finances. We’re looking at compounding interest that will most likely accrue over the course of two to three decades, not some get-rich-quick scheme designed to bring in millions by tomorrow.

Compounding Interest over Decades

Many people don’t understand the miracle of compounding interest because they look at it through a short-term lens. What begins as only a small return will snowball over the decades until it’s become a substantial sum.

Let’s say, for example, that you invest $100 and see a 6% return on it every year. After the first year, you have just $6 to show for it. Now, you could take that money and buy something with it or you could reinvest it and let compound interest do its thing. The second year, you’d have $6.36 to show for it.

That’s definitely no fortune, but keep in mind you did nothing different to gain that extra $0.36 either. However, after the course of a decade, that original $100 would have nearly $80 in interest to show for it.

Also, in this example, we’re talking a mere $100. If you’re thinking about becoming financially independent, that number would be much closer to $10,000 (perhaps not at first, but you could add to it). We’d also be looking at what that compounding interest would do over the course of at least 20, if not 30, years. Suffice to say, it would grow that money remarkably.

Being Realistic

While compounding interest is a beautiful thing, it’s no silver bullet. You must always ensure you are being realistic about your expectations where investing is involved. Otherwise, you may wind up quite disappointed or do something irrational like look for “more promising” opportunities.

Understand that this is a process that will take decades and some years will see better returns than others. Do this, and compounding interest will do the rest.

More than just about anything else, one’s ability to start putting money aside early will have the biggest effect on their success with investing. Don’t delay any further, then: Begin investing money wisely today.