It’s never too young to start investing. I personally started putting my paper route money into an Individual Retirement Account IRA (sure it was at the “suggestion” of my parents) when I was 12 years old. Starting investing earlier allows you to take advantage of the most magical investment concept known to man compound interest. Compound interest occurs when the interest you earn generates interest itself, and over long periods of time can produce tremendous investment returns. When you combine the power of compound interest with the benefits of tax deferred accounts (such as IRA’s and 401(k) accounts), the benefit of investing early becomes more pronounced.
The classic example showing how compound interest works is that you invest $100 at 5% interest. At the end of year 1 you have $105 ($100 + $100 x .05 = $105), at the end of year 2 you have $110.25 ($105 + $105 x .05 = $110.25), and so forth. When you draw this example out over a number of years the benefits of compound interest become more apparent. The moral of the story is the longer that you are able to invest your money, the easier it is to make large long term returns.
Another illustration of the power of compound investing is in the following example of one person and when they decide to start investing. If begin putting only $100 a month away into an investment account starting at age 20, and earn 8 percent a year on this account. Let’s also assume that this savings rate (of $100 a month) continues until you reach the age of 65. At the age of 65 you’d have just under $500,000 for your retirement.
Let’s say you wait until age 30 to start this savings program, by age 65 you’d have just over $215,000; hold off on starting to save until you’re 40, and you’d have a bit under $100,000. As you can see the sooner you start your savings program the easier it is to accumulate money over the long term. If you change the numbers to reflect a higher rate of savings (say $200 or $300) a month, the results become even more dramatic.
The sooner that you being investing in retirement, the easier it will be for you to amass a comfortable nest egg. Saving sooner rather than later may also enable you to retire earlier than you would have thought. Best of luck in your investing program and may you generate many happy returns.