There is a common misconception that investing is something you consider only when you’re approaching retirement. We live in a time that values instant gratification and encourages young people to put planning for the future on hold because, after all, you only live once! This way of thinking is a mistake.

We tend to think that we have plenty of time to save for the future, but we cannot afford to wait until it is convenient. Investing while you are young is one of the best decisions one can ever make. Starting early puts you at a major advantage, so the time is not later but now.

THE COMMON CHALLENGES

1. I don’t make enough money

While it’s clear that you don’t make as much money in your twenties as you expect to make in your forties, it does not mean you do not make enough money to start investing. It is important to recognise that a small amount can go a far way. Even $2,000 per month can make a difference. Don’t shy away from investing because you believe you don’t have enough. Simply start with making small investments and let your investment account show you that you do have enough.

2. It’s too hard

No one thinks that investing at a young age is easy and I understand that to many, investing seems like a challenging process. It requires focus and discipline, particularly for a young person. Don’t fall into the trap of thinking that you can invest “later” and everything will be fine. What many don’t realise is that by investing consistently at a young age, you will allow the process of compounding to work to your advantage. The longer your money is at work, the wealthier you will be in the future as the amount that you invest will grow substantially over time.

COMPOUND INTEREST

The first point that needs to be stressed is that compounding interest is your best friend and has enormous power over time. Albert Einstein called it the “eighth wonder of the world”. However, if you’ve ever taken CXC maths, the words compound interest might make you want to run in the opposite direction. Don’t let intimidation turn you off. Compound interest is your best friend when it comes to long-term investing.

In simple terms, compound interest is interest paid both on the original amount of money invested and on the interest it has already earned. Here is a simple example:

Let us say we have three close friends all at the age of 22: Trevor, Tony and Johnny. Trevor invests $24,000 per year consistently ($2,000 per month) and continues to contribute towards his investment for 40 years. Tony invests $24,000 per year consistently for 20 years, but stops contributing after 20 years and lets compounding do the rest. Johnny, on the other hand, decides to spend his savings for the first 20 years, but contributes twice the amount the other two have invested ($48,000 per year) for the following 20 years. They each get a modest six per cent interest on their investment.

The table below shows how much money in total each friend has invested after the 40 years as well as the value of their investment at the end of that 40 years.

After 40 years, it is obvious that Trevor came out on top, because he invested the most money for the longest period of time. However, Tony and Johnny both invested for 20 years and Johnny invested twice as much money as Tony, yet Johnny’s value is much less than Tony’s. This is the beauty of compounding. A little goes a long way over a longer period of time. Even a small amount of money set aside and invested on a compounded basis ends up giving you a substantial retirement account at 60 years of age.

Now that you understand the value of compounding, let’s explore a few additional benefits of investing while you are young.

YOU HAVE THE TIME — USE IT

Perhaps the most obvious benefit is that time is on your side. In your youth, particularly before you start earning an income, your biggest asset is time. Aside from having the time to build your investment, you also have the time to recoup your investment should the market take a downturn. When you are investing at a young age, you can afford to take some calculated risks. You can afford to take risks because if you lose any of your money in the market, you’ll have the time to make it back before you need it.

LESS FINANCIAL RESPONSIBILITY

This benefit is debatable as I know circumstances vary from household to household. However, it is likely that you have much less financial responsibility at a younger age. As you get older your bills, dependents and other financial burdens tend to grow. If you begin to invest before these obligations surface, you’ll be in a much better position financially when they do.

THE OVERALL LESSON

Achieving success with these long-term investment plans requires that you make consistent contributions, however small; adopt a long-term mindset and don’t allow the temptations of today deter you from your ultimate goal of building for the future. Take advantage of compounding and use the time you have. It’s never too early to start and no amount is too small. A small amount today can go a long way tomorrow.

Anya Mollison is an Office Administrator and Call Centre Coordinator at Stocks and Securities Limited.