Investing can be a daunting process. There are so many things you can't control -- market swings, company actions, and stock price movements. But when you get right down to it, being successful at it is pretty simple. Invest early and often, then wait as long as possible before tapping into your nest egg. Compounding is an incredible wealth builder, but it needs time to work. The amount of time your money stays invested is the most important factor in successful investing.
Let's look at some ways to maximize the amount of time you have your money working for you.
You may have heard the saying, "The best time to plant a tree was 20 years ago; the next best time is now." The same is true with investing. Ideally, your first investments should be when you first get paid for lawn mowing, babysitting, or chores around the house. We'll assume those days are long in your rearview mirror, so for you, the second-best time is now.
To get started, you'll need to set money aside that you won't need for the next three to five years. Setting up a detailed budget to look at all your cash flows and track your expenses can be a valuable and eye-opening exercise, but it isn't necessary. An easy (and fairly painless) way to start is to enroll in your employer's 401k or retirement plan by setting aside a small 1% to 2% from your paycheck. Even if you usually end the month with only a couple of dollars to spare, it's likely you can adapt your spending habits to account for this tiny dip in pay.
The paycheck deduction is a great tool to build wealth. It takes advantage of dollar-cost averaging and invests with every paycheck you receive, in good markets or bad. You can even pump up your savings with a yearly auto-escalation. This small action can have a huge effect on your results. This article shows how Escalating Ethan retired with more than 2.5 times Stubborn Sara's amount by increasing his savings rate by only 1% annually over a seven-year period.
Getting started early and gradually increasing your savings rate can lead to great results. But with any plan, it's important to understand that life can be unpredictable.
Be flexible and stay invested for the long term
"Everybody has a plan until they get punched in the mouth." -- Heavyweight boxer Mike Tyson
Sometimes stuff happens. I was unexpectedly laid off in early 2009, right when the stock market was at its low point. Since I didn't have an emergency fund, I had to sell stocks at a loss in order to pay the mortgage. Losing your job is only one of any number of life events that could sap financial resources and potentially require you to dip into your investments. Having cash set aside for a rainy day can help lessen the effect of these events and could help keep your investment plan on track.
Let's fast-forward a decade or two. Despite your best efforts at saving and investing, you might find yourself short of your financial goals. If this is the case, working longer can help extend the time you have your money working for you. The good news is, it doesn't necessarily have to be in your current job. Many employers offer flexible work arrangements or retraining to keep experienced employees on the payroll. Be flexible enough to consider a side job for some extra cash or even a career change to extend your working life doing something you enjoy.
Achieving success in investing
The formula isn't hard to understand. The more money you have invested for more time, the higher your chances are of reaching your financial goals. Even if you don't have a lot of money to invest today, start by setting aside a little bit now, increase the amount over time, and be flexible with your plans. Your future self will be very happy you did.