Investing early has its benefits
The heights by great men reached and kept were not attained by sudden flight. But they, while their companions slept, were toiling upwards through the night — Henry Wadsworth Longfellow
DICTIONARY.COM defines investing as putting money to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value. Investments may take many forms. Some examples include the purchase of property, shares, bonds, mutual funds, government paper and other types of investments like starting up or buying a business.
Investing is a contingency that has to be practised, and then formed into a habit in order to be beneficial to the individual. A benefit of investing early is the potential for higher gains. A longer investment time frame allows for more potential growth. This is due to the power of compounding, which Albert Einstein deemed to be one of the eighth wonders of the world. Compounding is defined as the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Suppose you invest $100 in Coca-Cola, the world’s largest nonalcoholic beverage company. The first year, the shares rise 20 per cent. Your investment is now worth $120. Based on good performance, you hold the stock. In year two, the shares appreciate another 20 per cent. Therefore, your $120 grows to $144. Rather than your shares appreciating an additional $20 (20 per cent) like they did in the first year, they appreciate by $24, because the $20 you gained in the first year grew by 20 per cent too. If you expand the process out, the numbers can start to get very big as you are making money on your initial investment and more importantly, the earnings each year are also adding up to make even more money on your initial investment. An example of this is if you invest $100 at 20 per cent annually for 25 years. This investment without adding any money to your investment would grow to nearly $10,000 due to the power of compounding.
Investing early can be goal-centred. This involves you putting aside savings at regular intervals to purchase a home or for other goals like sending your kids to college. Saving is essential to investing as you will first need to have money before you can invest. This requires discipline and a plan/goal in mind. No matter how small you save, it is essential to start. This involves budgeting, carefully watching your expenses and taking every opportunity to put aside a set amount each month. As some months are more expensive than others, you will have to be dedicated and committed to the cause, saving where you can and as much as you can. The more you save and the earlier you start, the better off you will be later in life. The end goal for most of us is financial freedom and living comfortably during retirement. This is easier said than done and so we have to have a plan, and follow it.
Parents should initiate this practice of teaching their children to save and invest early, so that these youngsters will develop sound financial habits. Saving and investing is critical, and should be practised by everyone.
Another benefit of investing early is the accumulation of shares over time. This practice allows investors to potentially purchase shares at lower prices, and watch their investment grow over time. An example of this is if you purchased shares in Coca-Cola on the international market at US$20 in 2009. This investment would be worth approximately US$41 today, with a total return including dividends at about 388 per cent. If you are going to be adding to your investment each year, a dollar cost averaging technique can be used whereby you buy a set number of shares each year.
Saving and investing is extremely important in planning for your financial future. It is essential that you save and invest early, as the power of compounding will be on your side. It is also important to set your goals, and develop a plan to achieve your goals.
Jean-Ann Panton is a wealth advisor at Stocks and Securities Limited. Contact: jpanton@sslinvest.com
