When should you start investing? Yesterday!

Matt Richardson

I have written about this subject before, so forgive me if this is nothing new, but this concept has not changed.

When people ask when the best time is to invest, the answer is always yesterday.  The reason for this answer relates to the power of compounding.

This is best illustrated with an example of 2 investors who invest in the same investment which earns 8.0% per annum.

Investor One starts contributing $5,000 per year at the age of 25 for 11 years ($55,000 in total), but makes no further contribution to the investment up until the age of 60.

Investor Two does not start contributing $5,000 per year until they are 35 years old, but contributes the same amount for 26 years ($130,000 in total).

Result – At the age of 60, Investor One has $615,580 and Investor Two only has $431,754 (a difference of $183,826), even though Investor Two has contributed $75,000 more than Investor One.

As another example, if you were trying to accumulate a savings “nest egg” of $1,000,000 the following table confirms how long it would take, given different investment returns of 5.0%, 7.0%, 8.5% per year and different monthly contributions of $400, $600, $800 and $1,000.

It would take 49 years at $400 per month at a 5.0% investment return to accumulate $1.0m. The amount you would have contributed over this time would be $235,200.

If you were contributing $1,000 per month at a 5.0% investment return it would only take you 33 years.  This is only 2/3rds of the time it took at $400 per month.  However, you would have contributed $396,000 to the investment (this is $160,800 more overall)!

All I am trying to emphasise is the earlier you start investing:

  • The more years you have to make compounding work in your favour.
  • The easier it is to get into a savings habit, as you have already started this discipline.
  • The easier it will be to ride out the investment “bumps” which will continue to happen when markets tumble or property prices plateau or even fall.

Waiting for markets to drop to begin your investing never works.  It is best to start as soon as possible.  You do not have to invest heavily initially, but it makes sense to get started as soon as possible.