When it comes to saving and investing the earlier you start the better. That is because you have time on your side. With more time, the greater your potential return on investment can become. In addition to higher potential returns, there are also other benefits to saving and investing early, which I will be going over in this post.
1. Power of Compound Interest
The amount of capital you have in your savings and investments grow exponentially over time. How is that possible you may ask? Well, that’s due to the power of compound interest.
What exactly is compound interest? To put it simply, it is interest calculated on the initial principal, which includes all of the accumulated interest of previous periods.
So, now let’s go through an example to illustrate just how powerful this concept is. Let’s say you have $1,000 to start investing in the stock market and you plan to pay yourself $500 per month, which goes to your investments. To keep it simple, your investment consists of one index fund, the SPY, which follows the S&P 500. The long-term average return rate for the S&P 500 ranges between 5% to 7%. For this example, let’s go with 5% to be conservative. Executing this strategy for 30 years, you’ll end up with a total of $403,058 with a principal of $181,000, which means compounding interest end up adding another $222,058.
If you’re interested, you can try out this compound interest calculator and put in your own numbers to get a better idea of how things will look for your situation.
2. Peace of Mind
Having peace of mind about your future is important. You can’t see into the future, but what you can do is prepare for it. When you have some savings and investments for your future self, you will find yourself to be less stressed. You feel like if anything bad happens you will be able to get through it at least from the financial perspective.
Then there is retirement itself. When you are near retirement age one of the last things you want to be concerned with is how you’ll get by without income from working. If you don’t have enough saved for retirement you can find yourself working during those times.
3. Building the Habit
Human beings are creatures of habit. Whatever your habits are, you’ll do them with or without realizing it. When you start to save and invest early, you turn it into a habit. Also, there is a high chance that if you start early, you’re not at your peak earning potential, which means you can build up your wealth even more.
4. Requires You to Prioritize
Paying yourself by saving and or investing will require you to prioritize your expenses. It’ll require you to re-evaluate your expenses and cut out what is not necessary. Maybe you’re paying for a subscription that you use every so often or have a gym membership, but don’t remember the last time you went.
It is not so much about saving a few dollars that is important, but rather it is the fact that it is requiring you to differentiate between needs and wants that is important. When you start identifying things as a need or a want it becomes easier to manage your expenses. Something that is a want becomes something that you save for or don’t buy if there is no budget for it. Eventually, you’ll find yourself with money leftover because you’re spending on the needs and holding off on the wants.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
Are you already saving and investing? What are the reasons that made you want to save and invest? If you’re not already saving and investing, why is that?
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