The longer your investments have to compound, the bigger they will grow.
This also works in reverse, so the longer you have a debt you have to pay interest on, the more you will end up paying.
Most studies on investment show that if someone saves money for ten years from age 25 to age 35 and then leaves it to grow, they will end up with more money than someone who saves the same amount of money each month from age 35 to 65. That is the power of compound interest.
The best time to start saving and investing is yesterday. The second best time is today.
However, if you have debt that you are paying interest on, it’s normally a better idea to pay it off first before investing (this is because paying off debt gives you an automatic return of whatever the interest you are paying on it is, as opposed to investments which are generally less of a sure thing).
So take a look at your financial situation. Do you have credit card debt? Student loans? Car loans? Pay them off as soon as you can.
Then you need to make sure you have some easily accessible cash for emergencies. This is because the last thing you want is to have to sell some of your investments at the wrong time because of some emergency that needs cash.
The amount of money you need will depend on your circumstances. If you have a family you will need more. If your job is less stable you will need more.
Three to six months of living expenses (rent, food, bills) should do the trick for most people. I currently have four months and plan to increase that slowly to about six.
Once you have paid off your debt and saved up an emergency fund you can start thinking about investing.
We’ll talk about that tomorrow 🙂