3 reasons to start investing young
Not sure when to start investing? Quick answer: the sooner the better.
Though you may be thinking more about paying off debt and building financial independence, when investing in your 20s and 30s, you have a head start of three or more decades to earn money before a traditional retirement age.1 Read about how to balance paying off debt and investing for the future.
“Investing a small percentage of your income as soon as you’re able to does two things,” says Heather Winston, assistant director of financial advice and planning at Principal®. “First, it establishes good savings habits. And second, it means your money may grow more over time.”
Many employers offer 401(k) and 403(b) plans (some with matching contributions). Retirement plans are one common version of investing. So, why not start now?
Investing a small percentage of your income as soon as you’re able to does two things: First, it establishes good savings habits. And second, it means your money may grow more over time.”
Heather Winston, assistant director of financial advice and planning
1. Time is on your side—don’t delay.
Stocks have historically generated strong returns over long periods of time.2 What's more, the earlier you invest, the more time compounding interest can do its work.
How does compounding interest work?
Simply put, as your investment grows, that growth—in the form of dividends and/or capital gains—is reinvested into your initial investment. More money is then earning more in interest over time.
“There’s an old adage that says time in the market is more important than timing the market,” Winston says. “And starting when you’re young—even with seemingly small dollar amounts—may put you on a path to success in the future.”
Say you make $40K/year now. Retirement contributions may add up significantly over time.3
2. Inflation can still put “safe” money at risk.
Keeping money in the bank seems safe, right? In some respects, it is—the dollar amount of your money doesn’t decline. But that doesn’t mean it’s necessarily holding its value.
Inflation is the general increase in prices over time. Though you can’t always see it or feel it, inflation can erode the purchasing power of money as time passes—sometimes more powerfully than a market decline would.
Even accounts that pay a fixed interest rate may lose ground after inflation. Stocks, on the other hand, have historically outpaced inflation, sometimes by a wide margin.4
At a historically average 3% inflation rate, the value of a dollar you save today will be cut in half in 24 years.
3. A higher risk tolerance may offer higher returns.
For most young investors, traditional retirement is a distant dream (sorry). The upside is that your retirement investments will remain untapped for many years, meaning you may be more tolerant to risk. If the market becomes volatile and your investments lose some value, they’ll likely have time to recover.
Of course, with that greater risk, comes the potential for greater reward.
Know your goals and create a plan.
Investing aggressively is more than just choosing the right mix of investments. Know what you’re investing for (your goal) and if you’re setting enough aside to attain it.
It may help to think about your goals in terms of time—short term being a couple of years or less, medium term being five to 10 years, and long term being 10 plus years. “Really envision what you want your future life to look like and what you’re willing to do to attain that—tradeoffs will need to be made along the way,” Winston says.
“Keep your goals simple, so you can create consistent behaviors and positive habits—and ultimately control the amount you save.”
What to do next?
- Have a retirement account from your employer with service at Principal? Log in to principal.com to see if you’re maximizing your contributions. First time logging in? Get started.
- Need help figuring out how investment risks work with your financial goals? A financial professional can help. Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.
1 Based on the Social Security Administration’s definition of “full retirement age.”
2 Source: Standard & Poor’s
3 These figures may be higher or lower than the maximum dollar amount current tax laws allow you to contribute to your retirement plan. These figures are using a 7% annual rate of return and 3.5% annual income growth. The maximum contribution amount is indexed annually for inflation. Check with your organization’s benefits officer. The assumed rates of return in this chart are hypothetical and do not guarantee any future returns nor represent the returns of any particular investment choices. Amounts shown do not reflect the impact of taxes on pre-tax distributions.
4 Of course, it’s important to keep in mind that any investment option is subject to investment risk. Shares or unit values will fluctuate, and investments, when redeemed, may be worth more or less than their original cost. It’s possible for any investment option to lose value.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets. There is no guarantee that a target date investment will provide adequate income at or through retirement.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Investment advisory products offered through Principal Advised Services, LLC. Principal Life, Principal Securities, and Principal Advised Services are members of the Principal Financial Group®, Des Moines, Iowa 50392.