It’s not taking out a mortgage. It’s not marriage. It’s not even having kids.
It’s time.
The most important financial decision I would argue you can make – one that is inherently irreversible – is when you actually start investing for your future.
I’m sure that no one can reach age 25 in North America without being exposed to some version of the chart that shows you how much you’ll have at age 65 if you invest $100/month starting at age 25 vs. investing $400/month starting at age 45. If you start early enough, the numbers show, then you won’t need to invest as much, either, just due to plain compounding effects. These charts assume (a) a certain consistent level of annual interest, usually around 7-8%, and (b) that you consistently reinvest 100% of the dividends and interest.
If you can make good on those conditions, then these charts are certainly valid. And that means you need to start today if you haven’t already. Remember: the best time to plant a fruit tree was 20 years ago. The second best time is TODAY. So I don’t care what age you are, but start saving your money!!
A. Put it in a high-interest savings account if that’s where you’re most comfortable.
B. Put it in a government or investment-grade commercial bond index fund or ETF.
C. Start a DRIP! (This is my recommendation if you’re still in your 20’s, 30’s, early 40’s)
D. Invest in an international (non-U.S.) equity ETF that pays dividends as well as grows capital.
There are other financial decisions and mistakes you can make, but they’re all ones you can basically turn around if you needed to or tried hard enough. Kids are expensive, but one day they might be earning quite a bit and end up helping you out! Or you can also make money off your house by renting out a room. You can sell your car back if it costs you too much. But you can’t ever go back in time when you wish “if only I had known how to invest when I was 19.”
When we’re young and we have our first jobs, it’s easy to want to blow all the money on fun things and enjoy new independence. It takes real forsight to be able to save any amount of that. And face it, if you’re working at the corner store or Starbucks, you’re not making much anyway, so it seems like there’s no point even trying to save, so you might as well spend it. Life is short, right? You worked hard for that money.
But you know what? That will always be the problem. There will never be a day when the money you really need is going to rain out of the sky. It sucks that we have to work for it, so hard, and then it sucks that we have to part with it again and try to make it work for us. It doubly hurts when we all go through what just happened in the markets this past fall 2008. But unfortunately, for most of us, saving and investing (and other income-growing ventures) are the only option we have! So learn all you can about it and start doing it now.
Some will argue that you don’t have to study about investing – just take your cash and plop it into an index fund, then wait. Like planting a seed, it will magically grow. Maybe! I agree that index funds are amazing investment vehicles (and I recommend you read up on them, too), but I disagree that anyone should ever not be willing to do some basic studying on what the heck they’re invested in and how it basically works. Might as well just turn all your money over to an anonymous “financial planner” on the other end of a phone line and hope it all works out. Not what I’d recommend! You don’t have to read up on your stocks every day or even every week, but at the very least, go get one of those “Dummies’ Guides to Investing” books and just learn the basics. Trust me, it will empower you and you’ll be better off for it.
But don’t wait too long before you start investing. There will always be more and more information – at some point you need to just get started. Then you can keep reading about it. In order to get started, I recommend enrolling in a fee-free DRIP (dividend reinvestment plan).
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{ 14 comments… read them below or add one }
So True, So True! Time is the great equalizer for us all. It is the most important and most valuable treasure we will ever have. “Start doing it now” This is the key. Success won’t wait for you, you have to take action and go get it!
Yes, and along with that goes the idea that conditions will never be perfect for any thing you want to achieve, either… even if you’re just waiting on one thing, you could still start making other kinds of progress towards your goal. If the problem is that you don’t have the goal, or don’t have the motivation for going after any goal, then maybe this is something you should look into. What do you think?
I am putting money into an Emergency Fund and paying down consumer debt.
As soon as I reduce those amounts I’m going to begin feeding my IRA & 401K hard!
Doing it this way because it is much more lucrative for me to pay down the debt first. Debt will be gone this time next year (although I’m shooting for the end of this year).
I personally realized the time I have wasted in the last few years. I mean if I knew what I know now, I could have been living on my own and way ahead financially.
Then again, things happen for a reason.
Either way, not giving up and taking things one day at a time has worked quite well for me recently.
@Matt – that’s great, but I might check out some DRIPs too, you can start contributing as little as $25/month (or less frequent) to some; could allow you to still get started investing in a solid div-paying company.
@Tom – ditto… I wish I had just started getting fired up sooner and doing the reading and research sooner… even in highschool I could have been investing in a DRIP! And one point working two jobs but I wasn’t saving a thing, makes me a bit sad to think of, now…
You goal HAS to be something that makes you jump out of bed every morning, ready to take on and conquer the world! This type of goal creates passion, and that passion will fuel your dreams! It should lead to a cycle of fun and success.
Does that all make sense?
Sometimes it’s too much to try to determine a goal in advance. If you know you’re passionate about something (at least in the sense that you can keep going/working at it long enough and you don’t realize the time passing), I think that’s an important clue. I think you should pay attention to those things. They may lead you to the goal you could be making. Hope that doesn’t sound too confusing. Sometimes I think we can confuse ourselves by trying to determine in advance what our “goal” or “calling” should be. Doesn’t mean we don’t have one, but we might have to follow a certain path/trail of clues to get there…. so definitely go with the flow when you’re fired up, and stay conscious to what you’re liking about it. Great comment, TAM!
It’s quite common to hesitate and wait for the stars to align before taking action, which is unfortunate. Life rewards action, not ’someday’ planning.
It’s funny how, as I continue to mature, I wish I could go back and kick my old self in the rear and get me in gear quicker!
“Sometimes it’s too much to try to determine a goal in advance.”
Couldn’t agree more with that. It’s vital to constant retain a certain degree of curiosity in our routines, working on projects/interests without an explicit goal or target (yet anyway).
It does make you sad sometimes and upset but I figured that until you haven’t experienced the other side, you won’t be able to come to appreciate what you have and know now.
@blake, @tom – yes, there are some things you can figure out in advance, but some things only experience can help you with, I think. Best thing to try is to figure out whatever you can in advance, but if you feel you’re falling up short, or something’s missing, then you might need to just go out and take action and get some results to test it out.
Investing early is important because it gives you more time to make mistakes, learn from them and then make the right choices later in your life, when you make more money anyway.
Investing is critical for all of us because it gives you opportunity to make money at your pace, lead a comfortable life that one gets post financial independence. And it also allows one to finally retire from 9-5 jobs
@Manshu, excellent point about giving yourself time to learn by making mistakes. Thanks.
@rajeev – another thing investing for dividends can do is that it can help spread out the income schedule of your income. If you normally get paid only once a month, say, you could schedule dividend and other cashflow payments to help even out your overall cashflow schedule.