A recent US-based study found that 36% of women over 35 said they regret “waiting too long to start saving for retirement”. That is a telling statistic, emphasizing the importance of how early investment, especially for women, is key to our future financial health and freedom. While investing and taking stock of our monetary situation can seem daunting, more and more women are starting to research financial resources and plan their investments and take concrete steps to become more independent. But why exactly is it important to start early? We discuss how starting finance earlier can help you build a bigger pot.
1. You Can Take On More Risk
Starting your investment journey at a younger age impacts the amount of risk you are able to take on. Having 20 years vs 40 years when planning for your retirement makes a big difference in the type of investments that you purchase. At a younger age, you are able to build more aggressive portfolios - ones that are higher in risk but also can produce larger gains. The closer you get to retirement, it is recommended to focus on lower risk investments such as bonds or certificates of deposit. This is because when you have more time till retirement you are able to manage the volatility and earn back losses. With the higher earning potential, high risk investments made in your early years can help you in the longer term.
2. You Can Harness The Power Of Compounding
One of THE most important reasons to start investing early is the “magic of compounding”. Money is known to grow exponentially, and the more time you have, the bigger impact compounding can have on your balance. But what exactly is compounding? It is the process in which your investment earnings are added to the initial amount you invested (the principal), therefore growing your base on which earnings may accumulate. So for example, if a 25-year-old and a 45-year-old each begin investing $10,000 per month with an interest rate of 8%, by the time they retire at 55, the early investor would have $15,002,952 saved compared to $1,841,657. This is not only because the 25-year-old invests more, $3,600,00 (10k x 12 x 30) vs $1,200,00 (10k x 12 x 10) but because they are earning an interest on the interest. Thus the growth ratio is 4.16 over 1.53 for the older investor.
3. Your Spending Habits Will Improve
Once you are involved in your finances and are taking an active interest and action in investing for your future, you are also likely to focus on other aspects of budgeting and finance. If you are aiming to set aside a percentage of your income to invest, you have to manage the rest of your expenses with the amount that remains. This will help you develop disciplined spending habits, by prioritizing which area is important. As they say, “money saved is money earned”. And this is not to say that you shouldn’t buy that Chanel bag or you shouldn’t go on your holiday to Mexico (I sure did!), but rather that you are aware of your budget and are therefore intentional with where you spend. So, it is likely that you might end up having more capital to work with compared to someone who has never studied their income and expenses and tried to invest.
4. You Can Retire Early
At the end of the day, we are all looking to ultimately stop working and enjoy retired life, without worrying about how we will finance our lifestyle. By investing early, and utilizing the benefits mentioned above, you are able to accumulate wealth quicker and depending on your investments, you may be able to retire earlier. Whether this is you traveling the world or enjoying a cute home with a garden, you will be able to focus on the areas of life that are important to you instead of being bogged down with the weight of everyday work life. Those who start investing later in life may not be able to attain the same level of wealth and thus cannot retire and sustain their life.
5. You Can Achieve Financial Independence
The motivation behind investing may be different per person, but it has a big impact on Women’s Independence. You could be building a pot for a rainy day emergency fund, to pay for a mortgage, to repay your student loans, or just to be able to retire at a certain age, but the sooner you start investing, the faster you will grow the money. And with these savings, you are not beholden to others in your life and are therefore able to achieve the goals that you set out for yourself. No more sticking with a partner because you’re worried about affording rent or staying in a toxic job to maintain your expenses, by investing early you’re able to make your money work for you so that ultimately you have the financial freedom you deserve.