Regrets, I've had a few.
No, that's not an original line, and I'm not the Chairman of the Board (kids, ask your parents).
Too few to mention? Generally. But one of them, investing-related, is not starting earlier.
See, there are only really three things that determine the eventual size of your nest-egg:
1. When you start
2. How much you invest
3. Your investment returns
Generally, you can give #3 a little tickle-up, if you're able to get good at this investing caper. And it really can make a significant difference. So you should try (we do: it's what we offer here at The Motley Fool).
But, unless you're Warren Buffett (and it may not even be true for him), your investment returns are almost certainly third in this list, in order of priority.
How much you invest matters a lot, too. The person who can find $100/mth to invest is going to do better than the person who invests $50 each month, all else being equal.
True, it's not easy, with interest rates and inflation doing a little one-two number on our personal finances, but you really should be increasing / maximising your regular investments, if you can.
Which leaves us where?
With the first one, of course.
I hope you've seen the numbers that show the awesome power of compounding, by starting young?
You haven't, or you want to show someone else? Excellent, here's an example:
Let's say Penny can save, and invest, $300 per month, every month, starting at age 21, then she stops at 31. If she gets an average return of 9% per annum (roughly the long term share market average), she'll have contributed a total of $39,600, and will have $1.29 million by the time she turns 65 (before taxes, fees etc).
Now take Kenny, who starts at 31, instead. And let's assume he doesn't stop contributing the whole time. Over the following 34 years, Kenny saves and invests a very impressive $122,400 – more than three times Penny's amount. And when he turns 65? Kenny will have the still impressive, though slightly relatively disappointing, sum of… $773,000.
That is, Kenny contributed 3.3x as much as Penny, but finished up with 40% less overall.
Why?
Time.
Compounding needs time, and it's absence is hard to overcome.
One more example. Let's say Kenny is a great investor. He manages to get 2% more than Penny every single year, on average, over that period – 11%, rather than Penny's 9%.
He's still invested more than 3x what Penny put away, beat Penny's annual returns by 2% per annum, and he ends up with… $1.22 million. Better, sure. And very welcome. But still less than Penny.
Now, I'm not saying you shouldn't try to maximise your returns. Of course you should!
Penny would end up with a whopping $2.7m if she earned 11% per annum.
But I am saying it's hard, not guaranteed, and you shouldn't rely on it to meet your financial goals.
(And Penny could have earned even more if she'd kept contributing after 31, too.)
That's why all three contributors matter: time, regular investment amount, and your return.
You should try, hard, to maximise your returns, if you're of that mind. (But if not, a low-cost, broad-index based ETF is a very good alternative).
You should try, hard, to save and invest a little more, if you have the financial capacity.
But the biggest contributor for almost all of us, is time (Indeed, even Buffett earned more than 95% of his fortune after his 55th birthday, largely thanks to the benefits of time!)
Now, as the great Mal Leyland (yes, of Leyland Brothers fame… another one to ask your parents about) likes to say, you'll never be as young as you are today.
If you've already started investing, you've got that covered. I wish I'd started earlier. You probably do, too. But we can't. All we can do, now, is work on the other two.
But… if you're reading this, and you haven't yet taken the plunge, (or if you know someone who hasn't, and who might need a nudge from what I've just written) maybe you should make today the day.
Yes, there are (ever-increasing) bills to pay. Yes, it literally is impossible for some people to find the money.
But for the rest of us?
We can probably find a few bucks out of some unnecessary spending. And maybe that's all it starts with… a few bucks. Then another few bucks next week.
Then, when interest rates fall, or you get a payrise, or you finally get sick of paying for that seventh streaming subscription, you can slowly and steadily add to your regular monthly investments.
And I want you to be really honest with yourself in terms of the money you really can save. No, I don't want you to live like a hermit (internet reception inside caves is notoriously poor, for a start), but I want you to ask yourself whether, looking back in 10, 30 or 50 years, you'll be glad you spent that money on [insert thing here] or whether it really should have been invested, instead.
Up to you, of course. No judgement from me. But I do know I've wasted too much money in my life – money I wish I'd invested instead. (There's some 'frivolous' money I'm still glad I spent, by the way… balance is important!)
Bottom line? Kenny did a great job. But Penny did better.
If you have the chance, and the choice, be like Penny!
(If you're jealous of Penny, but want to be even more envious, be jealous of teenagers who have their whole lives – financial and otherwise – ahead of them. They… just don't always appreciate it. What investing advice would I give teens – or their parents – to get started investing? I'm glad you asked (well, I'm glad one person asked me on Twitter, which prompted these thoughts). I'll answer that specific question next time, in this space. Stay tuned!)
Fool on!
