The best time to plant a tree was 20 years ago. The second best time is now. I am sure most of us heard this proverb before and it applies perfectly when you are contemplating if you should start investing.
The perfect time to start investing would have been the moment you got your first dollar. Warren Buffett bought his first stock when he was 11! When I was 11, I was only thinking about which computer game I was going to pester my dad to buy for me. (I’d like to think no eleven year old kid could resist computer games and Mr Buffett would have chosen a computer game at 11 if he could. But his game would have probably been investing related, the investing gene was just in his blood!)
Most of us did not start investing that early, but there is still plenty of time and opportunities ahead of you. The most important thing is to start investing now. It does not matter if you are 21, 31, 41, or even 51! As long as you start investing, you have a chance to better your finances.
I am sure there are many predicaments stopping you from investing now and some of the possible reasons are listed below.
- Why should I invest? My money is doing just fine in the bank
- I have no money to invest, wait till I save up some capital
- It’s too difficult and takes too much effort, I don’t think I can do it
The above reasons are causing your money to slowly drop in value and you are missing out on simple returns that you could have been getting.
1. Why should I start investing? My money is doing just fine in the bank
When you put your money in the bank, you will earn interest on it. Most savings accounts give an interest rate ranging from 0 to 1% a year, depending on your country and the kind of account you sign up for. My current savings account gives a grand total of 0.05% interest a year. (I had to check this number because I totally forgot that it even paid interest.)
So if you don’t invest and you have an account that pays you 1% a year, you may think that you are still getting returns at 1% every year right?
Wrong, you are not getting 1% a year returns.
In fact, you are actually getting a negative return. Your money is decreasing in value.
This is because of inflation.
On average the inflation rate of most countries is around 2% a year. This means unless you are growing your money at a rate higher than 2%, if not the value of your money is shrinking. The value of your money does not stay the same by not investing and leaving it in the bank.
On average, $2 is being taken away from every $100 you don’t invest. Using the Rule of 72, it will take around 36 years for your $100 to lose half its value.
2. I have no money to invest, wait till I save up some capital
A lot of people have this thinking that you can only start investing when you have a lot of money. That is simply not true. You can easily start with $500. (Although starting with more is definitely better than starting with less) But the reason to start now is, your money can only work for you when it is invested.
Let’s say you start investing with $500. And each year you add-on another additional $500 into your investment. Assuming you get a 7%/year return, after 15 years your money would have grown to $14,800.
Now supposed for the first 10 years you decide to save the $500 from each year and invest it all at one go.
In this case you start investing with $5000 and you still continue to add an additional $500 every year. For this case, even if you get returns at 12%/year, after 5 years this amount would only be $12,369, still lower than the first scenario (Unless this investment can grow at 17%/year for 5 years, then it will grow to $15,065, beating the first scenario)
So you can see that starting earlier, even at a lower interest rate, lets you unleash the power of compound interest on your money. (You can check out this calculator if you are interested to wield the power of compound interest.)
3. It’s too difficult and takes too much effort, I don’t think I can do it
Who says it needs a lot of effort? There is a saying:
“I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it.”
Investing works well for both the hardworking craftsmen and the lazy sloths.
If you are the kind who likes to get your hands dirty and you are willing to put in the time and effort, active investing would be for you. In active investing you read up on companies’ financial reports, analyse financial ratios and pick stocks that you think have potential to grow. This kind of investing would be tedious but the potential returns you can get are huge.
For a lazier form of investing (Oh yeah, there’s such a thing) passive investing is for you. In passive investing you would invest your money, preferably for the long term, and watch your money slowly appreciate in value. Of course for passive investing, your returns will be much smaller compared to what you can get from active investing. But it’s still higher than inflation.
One form of lazy investing is to buy an Exchange-traded fund (ETF). You want to look for an ETF that tracks indexes, like the Dow Jones or S&P 500.
An index like the Dow Jones or S&P 500 is made up of a lot of strong companies that have a track record of good financial growth. The companies in the index come from many different sectors so this gives you a very simple form of diversification. When you buy an ETF, you can also buy as little as one share of the ETF.
Investing in ETFs gives you good exposure, simple diversification and you can start easily with a few hundred dollars. And currently, this is also what I do for my own lazy investments.
I personally think everyone should know why it is important to start investing. You can be earning 10, 15 or $20k a month. But if you don’t know how to invest, you are always going to be working for your money. Your money is not going to be able to work for you. (The goal is the other way around!)
If you are not comfortable with putting your money to invest, know that your money is going to slowly and slowly drop in value due to inflation. It is not something that can be seen, but rest assured that it is happening, (Just like global warming.)
If you find investing risky, look around for some low risk investments and learn about them. If you commit 2 hours every week to learn about investing, by the end of the year you would have accumulated over 100 hours learning! Investing is a long term play. 2 hours a week might not feel like a lot, but in a year this can reach up to over 100 hours. Getting 6% returns a year may seem insignificant, but give yourself a few years down the road and you will definitely thank yourself for starting today.
(To be able to invest $500 a year, simply means you need to be able to save around $50 a month. Look at what expenses you can cut to make this happen)
Good luck and Start Investing Immediately!
Check out my course on Technical Analysis if you are keen to start investing right now! It teaches you the basics of using Technical Analysis to view stocks.
Dear Readers, as always thank you for reading and please share this article If you find it helpful! How did your investment journey go? When did you started investing? What are your thoughts on investing? Do you know of anyone who was very adverse to investing? What made them that way? Let me know in the comments!