Investing at an early age

You are never too young to start saving and investing. People that start investing when they are young are more likely to develop habits that will last a lifetime. The earlier you start investing, the more money you’ll accumulate over time. Everyone can find money to invest if they analyse and change their spending habits. The following are some tips to help the young and the not so young develop healthy investing habits.

Start early, start now. If you want to accumulate wealth, time is the most important factor. The longer you save and invest, the more likely you are to reach your goals and build sizable wealth. You can set aside more money to invest over a long period of time than over a short one. That may seem obvious, but many people don’t fully appreciate how powerful the effect of time can be on accumulating wealth.

If you start saving €50 a month when you are 20, and assuming a low rate of return of 5% per annum, by the time that you are 60 you would have accumulated €75,000. Starting at 40 means that you have to save €185 monthly to achieve the same result by 60.

Add to that, some asset classes have higher historical returns. As a comparison European Shares have averaged 10% annually and the past 30Years, the German index has averaged an incredible 28% yearly average in the same period. Regular long-term savings in these indices would have made many investors millionaires.

Add to your savings frequently. The frequency of your contributions (e.g. weekly, monthly, or yearly) has an important impact on your long-term success.

Make sure that you move your savings into a separate account; you segregate money between savings and consumption. This process helps ensure that you don’t spend the amount you intend to save. It is often easier to save small amounts monthly rather than the accumulated amount yearly. Several savings plans offered locally can get you started with this process. Regular investing also ensures that you average down during market corrections.

Use compounding when you invest. Move the savings into an investment as soon as possible. You'll earn a higher rate of return in an investment. When you move money from savings into an investment vehicle, you start taking advantage of compounding.

Compounding will make your investments grow faster, like a snowball rolling downhill. The longer it rolls, the faster it grows. Compounding works faster if you invest more frequently.

When you compound your investments, you are earning “interest on interest”. Over time, you earn interest on both your original investment and on the prior interest you earned.

Let your wealth compound. If you invest in bonds, compounding is the multiplying effect of interest on interest. For stocks, compounding is generating earnings on your prior dividends. In both cases, you should reinvest any interest or dividends your investments earn.

Frequency and time are also important. A greater frequency of compounding means you receive and reinvest earnings more often. The more often this occurs and the longer you let it continue, the more powerful the effect.

Take a serious look at your personal spending habits. If you don’t create a formal budget for yourself, you may be wasting money that could be put toward investing. Create a budget using your take-home pay from work and all of your expenses.

Look at your variable spending each month. Some spending, like your car payment and mortgage are fixed. Other types of spending are variable.

Review the money you spend on entertainment for the month. Say that you spend €250 going out. You decide to put an extra €50 of that spending into your investing plan, add to this as you income increases. If you are diligent about investing each month, the rate at which you will be able to accumulate wealth will increase exponentially.