This Simple Example Is Why Time Is Your Friend When It Comes to Investing

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  • Graham Stephan recently shared an example of how starting to invest at age 20 instead of 25 could lead to over $165,000 more in returns.
  • Because of compound interest, your investment portfolio will grow much more the longer you have it.
  • To get the best returns, invest in the stock market, either by picking stocks or putting your money in an investment fund.

Even if you need to start small, don't wait around to start investing.

One of the most popular pieces of investing advice is to do it right away. Even if you're in the early stages of your career and not making much money yet, set aside at least a portion of your income to invest.

Unfortunately, many people don't heed that advice. About 150 million Americans own stock, which sounds like a lot. But it's fewer than 60% of American adults, so there's still a sizable portion who don't invest in the stock market.

It's normal to think that you'll have plenty of time to invest later, especially if you're in your 20s or 30s. While many young adults feel this way, it's a huge mistake, because you're sacrificing your most valuable asset as an investor -- time. Financial influencer Graham Stephan recently provided a simple example of why time matters so much for investors.

How time affects your investment returns

Stephan shared a comparison of how much money you'd have at retirement (age 65) if you invested $100 per month and earned 8% per year. Here's the difference between how much you'd have depending on when you started:

  • If you start at 20, you'll have $502,111.
  • If you start at 25, you'll have $336,937.

You're only investing for five more years and contributing another $6,000 of your own money. Regardless, you end up with over $165,000 more.

Why do those last few years make such a big difference? This is normal with investing, and it's all because of compound interest. Compound interest is a term for earning interest on top of interest.

Let's say you invest $1,000 and earn 8% per year. After the first year, you earn $80, growing your portfolio to $1,080. In year two, you earn $86.40, for a new total of $1,166.40. That's $6.40 of compound interest.

Now, an extra $6.40 isn't much. In the early stages of investing, returns are usually solid, but unspectacular. But the longer you invest, the more compound interest you accumulate. That's why your portfolio can eventually grow by $30,000 per year or more, even if you're only putting in $100 per month. You're earning your 8% yearly return on a much larger amount of money than you had in the beginning.

Where should you invest your money?

There was a frequent question people had for Stephan after he shared that comparison of investing returns. Where can you get 8% per year on your money?

One of the best ways to possibly get that kind of return is by investing in stocks. If you do that, 8% per year is definitely doable. In fact, over the last 50 years, the average stock market return is about 10% per year.

To be clear, this doesn't mean you'll get 8% on the dot per year, or that you're guaranteed that amount. The stock market goes through plenty of ups and downs. But if you stick to long-term investing where you buy and hold for five years or more, the ups and downs should average out to a strong yearly return.

There are many ways you can invest in the stock market. One option is to open a brokerage account and pick a few dozen companies to invest in. However, this can be time consuming. A simpler approach is to choose investment funds, which invest your money into a basket of stocks for you. Most online stock brokers have plenty of these available. Options include:

  • Index funds: These track a market index, such as the S&P 500, and keep fees to a minimum.
  • Mutual funds: These are professionally managed investment funds. They tend to have higher fees than index funds, but there are low-cost mutual funds, too.
  • Target-date funds: These funds are set up with a specific retirement year in mind. Portfolios are rebalanced as they get closer to the desired retirement date.

For example, you could pick an S&P 500 fund. That index tracks 500 large stocks traded on the U.S. market. Or, you could put your money in a total stock market fund. Either of these options would get you a diversified portfolio that largely follows the performance of the market.

Time is one of the key factors in how much you earn through investing. Many investors wish they had started when they were younger, and while there's no way to go back in time, the next best option is to start immediately. If you invest regularly, your portfolio will grow more and more as the years go on.

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