Using Time to Your Advantage
Who wants to be a millionaire? If you have 35 or 40 years to play with, it’s easier than you might think. Consider this scenario:
Three men are determined to save $1 million by the time they turn 60. One man is 25, one is 35 and one is 45. With a constant return of 5 percent, the 25-year-old will have to put aside around $880 each month.The 35-year-old will have to put aside around $1680 every month. The 45-year-old will have to put aside a whopping $3741 each month, which is more than four times the monthly deposit of the youngest man.
When it comes to saving and investing, starting at a young age makes all the difference. Even small monthly deposits pay off handsomely decades later when it’s time to retire.
How Compound Interest Works
Compounding is a fascinating financial concept. Albert Einstein once referred to it as the greatest mathematical discovery of all time.
Thanks to compound interest, the youngest man in the example above won’t have to dig so deep in order to save. Unlike simple interest, compound interest accumulates on both the initial principal and the interest earned on an account. Simply put, it earns interest on the interest.
If the young man’s retirement account also pays dividends, as 401(k)s do, the dividends will also compound every time they’re reinvested. This young man will be laughing all the way to the bank someday.
Chris Linkas shares Einstein’s enthusiasm for compounding, and he knows more about investing than just about anybody. Linkas has been in finance for more than 25 years. He currently heads up a prominent investment group based in the U.K. He and his team of experts handle principal investments throughout the U.K. and all over Europe.
If you got to know him, you’d notice that he likes talking to millennials. There is passion in his voice when he urges young people to start saving. Even if you’re paying off student debt, Linkas promises, you’ll be glad that you invested a little something in your retirement every month.
The ability to leverage compound interest and time is just one of the benefits of starting to save early. Here are some others:
- You’ll gain years of experience in saving and spending responsibly.
Establishing ground rules early on will help you avoid a lifetime of reckless spending and financial uncertainty. The discipline to stick to a budget and cut expenses when necessary will serve you well as your capital increases. You won’t be as tempted to make poor spending decisions.
Watching interest accumulate will encourage you to save even more.
- You’ll be able to take greater risks and earn bigger dividends.
Somewhat risky ventures pay greater returns on investment than entirely safe bets.
Older people who haven’t been saving for very long are nervous about taking risks. If they sink all their retirement savings into a stock that goes belly-up, they won’t have time to recover financially. That’s why people approaching retirement usually stick to safer investments like bonds and CDs.
Younger people can afford to be a little more daring and build more diverse portfolios.
Linkas does advocate taking on a reasonable amount of risk, but he warns young adults to use common sense. Investing solely in overly risky stocks could result in an entire portfolio evaporating overnight. Instead, he advises maintaining a healthy balance of dividend-yielding stocks and bonds.
- You’ll be able to maintain a more stable, comfortable lifestyle.
With steadily increasing capital, you can afford to live in a good neighborhood, drive a reliable car, join a gym and purchase better insurance. You’ll have plenty to support a family and send your kids to the best schools.
If you remain disciplined, you’ll be in far better shape than your peers who have not saved. Save for retirement and invest shrewdly.
- You’ll enjoy a better quality of life in your golden years.
According to the financial gurus, American workers should have eight times their final salary saved on the day they retire. That’s what it would take to cover expenses for 25 years.
Young, healthy people don’t like talking about this, but approximately 70 percent of seniors need some kind of health assistance. In 2015, the average cost of a room in a nursing facility was $92,000 per year.
If ever there was a time to be forward-thinking, it is now. You can’t hope to have a good quality of life or avoid being a burden to your family someday if you don’t save today.
Again, saving even a little is better than not saving at all. Linkas would tell you to stop procrastinating and start putting compound interest to work for you. Time is still on your side.
Tips for Investing
Dividends are not especially sexy to young people, but Linkas points to their value as vehicles for starting a portfolio without much risk. Compounding dividends will become more appealing as your portfolio expands.
Linkas also brings up an advantage for millennials that he didn’t have when he was starting out: ever-evolving technology (KirkLand).
Young people have an ocean of financial resources online and can do their own research to find investment opportunities. Here are some of the tools available to you, and many of them are free:
- Educational websites and financial apps
- Access to investing tips from seasoned experts
- Trading platforms
- Time-saving software programs
- Analysis tools that operate in real time
- Financial chat rooms
Linkas stresses the importance of doing your homework before you make decisions. He also advises familiarizing yourself with broker fees and other costs associated with investing.
Even Linkas never stops learning. He continually tries new strategies to maximize his returns. Unlike many experts who specialize in one or two areas, he has rare insight into a diverse assortment of investment opportunities. He warns against becoming complacent in the market rather than being open to change.
Patience is another virtue that Linkas cultivated over time. Trying to do too much too quickly can result in financial ruin. As the hare in the Aesop fable learned, slow and steady wins the race. Take that moral to heart as you save for retirement and invest in your future.
More about investing young at https://medium.com/@chrislinkas