When Should I Start?
Date Added: May 1st, 2004
By Chris Stallman
| E-mail
"Hey, I'm 17
and about to start college in the fall. I'm paying my way
through college with scholarships so should I invest the money I
had saved? Or should I just wait until after college to start
investing? - Mark (Kalamazoo,
Michigan)
Our Response:
Thanks for the question. If the money you've
set aside for college won't be used at all, then I recommend planning
to start investing. But if you think you might need some of
it for unforeseen expenses, then you might want to keep at least
half of it in a traditional bank account or short-term CD.
But, really, now
is the time to start thinking
about investing, not after college. And here's why.
A long
time ago, Albert Einstein called compounding "the eighth wonder
of the world" because of its amazing abilities. Essentially,
compounding is the idea that you can make money on the money you've
already earned. The best way to explain this is through an
example.
If you invest
$1000 for 50 years at a 10% return that does NOT compound, you
will receive $100 per year for 50 years. At the end of the
50 years, you would have $6,000 (the $1,000 investment +
$5,000 in interest). Now, if you invested that $1000
for 50 years at a 10% return that DOES compound, you would have
$117,390!
As you can see, compounding has a lot of value
to investors. It makes their money grow a lot faster than
it would if it didn't compound. Compounding is also highly
dependent on when you start investing and the smallest differences
in when you start can make a big difference in your pocketbook when
you retire. Take this story for example.
John decides to start investing when he gets out
of college at age 22. He sets aside $1000 and earns an 10%
return for 43 years (he retires at 65). At that time, he'll
have $60,240. Jill decides to start investing
too, but she does so at age 17, before she enters college.
She sets aside $1000 she has earned and puts it into an investment
with an 10% return for 48 years (she retires at 65). At
that time, she'll have $97,017. <--That's a
difference of nearly $37,000 even though Jill invested the same
amount of money!
The way compounding works is that your money compounds
slowly at first but it picks up speed the longer it's invested.
For people who like to see things visually, here's a simple graph
of the upward-sloping compounding curve.
So as
you can see, starting earlier can make a big difference in your
pocketbook for when you retire. So my strongest advice to
you is to begin investing early and set up a regular plan to invest
a set amount (like, say, $50) per month. In fact, I recommend
you give Sharebuilder a look. You'll watch your nest egg grow
considerably. Just remember to hook us up with a yacht when
you're a millionaire.
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