Now-a-days, there's a pervasive narrative that suggests delaying investment until your 30s is acceptable, even prudent. This advice is often well-intentioned, but neglects the power of compounding and fostering good early financial habits. Another factor that is usually not considered is how the financial landscape will change. The amount of inflation and shifting tides could make it impossible to follow the previous patterns of investing. What if the stock market starts returning at a lower rate? The amount of money previously needed would no longer be enough. This article explores how the common guidance may be inadvertently setting up the younger generation to fail and why starting earlier can be crucial for long-term financial success.
The Illusion of Time
The most significant advantage younger investors have is time. Time allows for the magic of compounding interesting to work wonders. However, the prevailing sentiment often encourages young adults to focus on experiences and chasing their dreams. While these are important, exclusively adhering to them can mean missing out on years or even decades of potential growth.
The Reality of Compound Interest
Compound interest is the interest on interest, and it can turn modest savings into significant wealth over time. For example, investing $5,000 annually from age 20 to 30 and then stopping altogether can result in more wealth at retirement than starting at age 30 and investing the same amount annually until retirement. This example starkly illustrates how this common idea to delay investing may cost young individuals dearly in the long run.
Let’s look at some quick math based on the premise above: (Based on a 7% average return)
First scenario: You invest 5K from 20-30 and keep it invested until 65 years of age without adding new capital.
Investing timespan: 10 years
After 10 years of investing 5k per year it will be $69,082.23
Not touching the $69,082.23 from 30-65 would be $737,562.57
Second scenario: You invest the same 5k yearly from 30-65 years of age.
Investing timespan: 35 years
If you invested 5K yearly from 30-65 you’d have $691,184.39
Analyze the result:
Now if you kept investing you end up with $1,428,746.44
Now you can clearly see what an extra decade of investing is worth, in this scenario: $737,562.57
The Risk of Waiting
Delaying investment until your 30s can lead to substantial missed opportunities in terms of earnings. Financial experts sometimes understate this risk, advocating for prioritizing personal aspirations or life experiences in one’s younger years. This YOLO mentality, while appealing, can be financially detrimental to younger individuals. Furthermore, accumulating debt in one's late teens and early 20s can create financial burdens that delay the ability to invest until well into the 30s, hindering the total accumulation of wealth over time.
The standard guidance also ignores the behavioral aspects of investing. Starting early helps in developing disciplined saving habits, a deeper understanding of financial markets, the gravity of debt, and a better tolerance for risk. These are invaluable skills that can lead to more informed and confident financial decisions later in life.
The Changing Economic Landscape
Today's economic environment is vastly different from previous generations. With longer life expectancies, the potential for multiple economic downturns during one's lifetime, and the uncertainty of social security, relying on traditional financial advice may not be sufficient. Generic advice does not always account for these changes, leaving many unprepared for the financial realities of the future. What if S&P 500 returns dip to 4%, what if inflation increases to 10%, what if cost of living skyrockets, all these economic factors are impossible to predict. So the earlier you get started, the better off you will be in the long run.
The narrative that it's okay to delay investing until your 30s is a potentially harmful oversimplification. While it's never too late to start, the system's advice ignores the profound impact of starting early. Young individuals should be encouraged to balance immediate wants with the long-term benefits of early investing. It's not just about having enough to retire; it's about maximizing your financial potential, and that begins with challenging conventional wisdom.
From my vantage point, if I could distill my advice into two commonly used phrases it would be.
- “The best time to invest was yesterday and the second best time is today.” - Meaning invest now.
- “Time in the market beats timing the market.” - Meaning invest consistently.