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When is it the right time to start investing for retirement? What about saving for college? Or starting a nest egg for the future?
Most of us have probably asked questions like this of ourselves -- maybe when you got your first 401(k) or when you had your first child. But the foundation for investing can begin much earlier than that and lead to a stronger financial future. Investing is more than just stocks, bonds, and retirement plans. It's fundamental to everything we do.
Lessons that last a lifetime
Who says you need to have a brokerage account or even a driver's license to know a little bit about investing? When I was growing up, my mother would give my sister and cousin $2 to spend on anything they wanted every time we went to Target. Talk about some challenging decisions for a 5-year-old child!
Should I get one $2 toy, a pack of gum and some Nerds, or save the money and have $4 to spend next time?
If you think about it, these are decisions we make every day as adults. How much should I spend on food, clothing, a place to live, etc.? There are trade-offs with every one of these decisions, with regards to both our finances and our standard of living. We want to maximize the finite resources we have to the greatest benefit in our lives. This is nothing more than another way of investing.
If you start teaching investing early in life, there are concepts -- like return on investment, sunk costs, and compound interest -- that transcend looking at stocks. Whether we realize it or not, we use these skills every day.
The math works out better
Whether it's in a savings account, retirement account, or rainy-day fund, the art of compound interest works better the longer the money is invested. So any amount of money you can invest early in life will pay long-term dividends.
Below, I've built a chart that shows how much money can grow over time with a modest return of 6% annually.
In 10 Years
In 20 Years
In 50 Years
It's easy to see that starting early, no matter what you're saving for, pays off in the long run. And adding to your savings periodically is just as important as what you start with.
Where to start
I've spent time covering why it's important to begin investing early, so let's discuss how to invest early on in your investing career. Here are five picks that would fit well in any portfolio.
- Invest in what you know: Apple (Nasdaq: AAPL ) . Whether you're 8 or 80, Apple is a fun stock to own and follow. With iPods, iPhone, iPads, and Macs around the world, few companies are better known, letting you follow Peter Lynch's sage investment advice. Growing revenue, skyrocketing profits, and a cash pile bigger than some countries also make this a good stock pick for almost anyone.
- An eye on the future: SunPower (Nasdaq: SPWR ) . Part of investing is predicting the future, and I think the future of energy is solar. I've made SunPower my top energy stock for 2012, and so far the company is outperforming the S&P 500 by 22 percentage points.
- The power of dividends: Microsoft (Nasdaq: MSFT ) may not be the sexy pick Apple is, but it plays a vital role in a majority of the world's computers. With an 11.4 P/E ratio, 2.6% dividend, and over $50 billion in cash and short-term investments, it's a great stock as well.
- Brand power: Procter & Gamble (NYSE: PG ) is in your cart more often than not when you go shopping. From Tide and Duracell to IAMS and Gillette, the company owns some of the world's best-known brands. Not a bad place to start a competitive advantage.
- A growth machine: Green Mountain Coffee Roasters (Nasdaq: GMCR ) grew revenue 102% in the most recent quarter, and the company's Keurig coffee brewers are popping up everywhere. The company's 35 P/E ratio isn't even out of line given that kind of growth.
It's never too early
The lessons we learn from investing are transferable to almost everything we do in life, no matter our age. Investing teaches us about risk, saving, growth, and financial discipline, among other things. And these lessons are fundamental to what we do at The Motley Fool.
For three more stock picks that our analysts have identified to help grow your retirement fund, check out our free report, "3 Stocks That Will Help You Retire Rich." The report describes savings habits you need to build long-term wealth -- something we should all know more about. Click here to read it.