By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
One of the more consistently quoted investment concepts is the ‘time value of money’ and the ‘power of compounded growth’. But what do these terms and concepts actually mean, and how do they impact you? Perhaps a better way to describe these concepts is with the old saying ‘the early bird gets the worm’. Investing is generally defined as purchasing an investment (i.e. stock, mutual fund, etc.) with the intent of earning a profit. The chances of earning that profit and seeing your investment grow become easier the earlier you start investing. Starting to invest at an early age isn’t always easy, but there are several key benefits for doing so, including:
- Time is on your side – This is perhaps the most important benefit of all, the earlier you can start a disciplined savings and investment plan (even with modest amounts), the longer time horizon you have for investing and saving, as well as better chances of finding investments and developing an investment portfolio that will increase in value over time.
- Compounding Returns – Compounding returns can be extremely powerful over the long run, so the earlier you get started the greater the chance to take advantage of this. Due to the compounding return process, even modest and regular investments in an investment or retirement account can lead to big benefits.
– For a simple illustration, an individual saving $100 per month starting at age 20 could end up with approx. $264,000 at age 60 *.
- Improved spending habits – Although this benefit is often overlooked, I’ve noticed that starting a disciplined savings and investment plan early can help develop positive spending habits. From my observations, those who invest early tend to be more aware of their income and spending habits and are less likely to financially over-extend themselves.
As stated earlier, starting a process of saving and investing at an early age isn’t easy, but waiting until it’s a convenient time can lead to a significantly reduced nest egg. Don’t shy away from investing because you don’t have enough, simply start with small investments and give them time to mature and grow. If you need some help reviewing your savings and investment goal, and discuss ideas for creating a plan, contact a Benjamin F. Edwards financial advisor today.
*Assuming market returns 7% a year, compounded monthly