Your future plans may not be set in stone. It’s smart to start investing now, though, even if you don’t have a specific financial goal in mind. That’s because when it comes to successful investing, time is a great ally.
Saving and investing are opportunities to earn returns over time—whether it’s the price of a stock increasing or interest paid to you by a financial institution—potentially setting you up to fund more of your goals once you’ve defined them.
Compound growth means that you earn interest on the principal and the earnings it generates over time. In the case of the stock market, that means that if your investment grows in value, additional growth is based on that new amount, not the original investment.
As an example of how investing may help your initial amount grow, and how investing earlier may be beneficial, consider the hypothetical scenario of triplets Nick, Amanda and Paul, who each receive $3,000 for their 21st birthdays.
At age 61, the triplets are nearing retirement. Nick has earned $0 on his $3,000. After 30 years in the stock market, Paul has more than $17,200, while early bird Amanda, who has 40 years in the stock market, now has nearly $31,000 from that birthday present. Her extra 10 years of investing compared to Paul netted her $13,500 more than her brother.
- Nick decides to keep his money safe in a no-fee checking account that pays no interest.
- Paul initially deposits his money in a no-interest checking account and then invests in the stock market 10 years later. His investments generate an average annual return of 6%.
- Amanda immediately invests the $3,000 in the stock market, with the same average annual rate of return of 6%.