10 reasons why you should start investing and build wealth while young

10 reasons why you should start investing and build wealth while young
10 reasons why you should start investing and build wealth while young - YEA Kenya

If you know anything about money, you know that it grows faster when invested than when saving.

You should invest in improving your finances, accumulating wealth more quickly, and achieving your wildest dreams. With inflation increasing, you must either invest your money or watch it lose its purchasing power.

With that in mind, when should you start investing? 

The answer is as soon as possible; whether you are 20 or 50 years old, it’s always best to start immediately when you are ready. 

You are ready to start investing when you have paid out all your high-interest consumer loans and have a healthy debt-to-income ratio; you have a solid emergency fund and are living below your means.

If you don’t have those under control, you will struggle to find any money to invest.

Starting your investment journey allows you to gain experience and become more comfortable taking risks, and as time goes by, you become a better investor. Your efforts will pay off, and your future self will be grateful. 

And that’s not all. This article will explore ten more reasons why investing is never too early. 

1. You have the advantage of time

When it comes to anything in life, including investing money, time is your best currency. Starting early, preferably when you are still young, offers three benefits. 

Extended Time Horizon: When you start planning for long-term financial goals like retirement early, you can invest more and get the best out of your money.

A person who starts investing for retirement in their 20s will likely have a more significant nest egg than someone who starts in their 40s.

Flexibility: When you start investing early, you don’t need to invest a lump sum of money. You can build your investment slowly at your own pace.

In short, you won’t be competing with time, trying to play catch up. Your small investment will grow exponentially in the long run.

Ride out Volatility: The value of investment reacts to market volatility; when this happens, your investment can lose value.

Starting to invest early gives the luxury to persevere through market downturns. You can wait for years for the market to recover.

2. You have room to take risks

Investing and risk tolerance go hand in hand. Age is one of the main factors investors use to determine their risk tolerance.

The younger the person, the more aggressive they can be when investing.

Factors like financial goals and risk capacity play a major goal, but age is usually the determinant factor.

Consider this: Two parents, Parent X and Parent Y, want to start investing in their kid’s college tuition. Parent X is 28, and his kid is a few months old.

On the other hand, Parent Y is 53, and his child is in form three. What approach should they take when investing?

Since Parent X is young and has an extended time horizon, he can be more aggressive and invest in risky instruments. He has the time to withstand volatility; if he loses his money, he can start afresh even in 10 years.

But the same can’t be said about Parent Y. Parent Y has to invest conservatively because he’s almost retiring and will soon leave the workforce, and his child will be heading to university in two years.

He can’t afford to lose his money and doesn’t have the opportunity to bounce back if things go south.

Investors are more confident when young, allowing them to target the highest returns possible and take more risks.

3. Compound Interest adds up

Compounding refers to the process by which interest, dividends, or profits are reinvested to generate additional earnings.

Investing is a powerful way of building wealth, and compounding your returns allows you to make more money from your initial investment. 

To reap the benefits of compounding, you need to do three things:

  1. Start early: This allows you to increase the number of times your money is compounded.
  2. Extended your Time Horizon: Starting early isn’t enough; you must be invested for longer. Simply put, compounding rewards those who stayed invested for 30 years more than the ones who got out after 20 years.
  3. Don’t Withdraw your Profits: If you take out the gains on your investment each year without reinvesting it, you will end up with minimal returns in the long run, missing out on the magic of compounding.

Remember that you don’t need a lump sum of money to enjoy the benefits of compounding.

If you are just investing, try the cost average method. The concept is you invest small amounts of money each month over a longer period.

When you increase your investment, your returns will also increase.

4. You won’t miss out on opportunities

Every financial action or inaction will come to haunt you one day. When that happens, you will either be proud of your actions or have regrets.

People regret many financial decisions when young or at the top of their earning potential. One such regret is not investing.

You can do everything right, including saving more than 20% of your monthly income, but if you don’t start investing early, you will miss out on growing your money.

Saving money is important, but if you want to prosper financially, you must start investing. The concept behind this is simple.

Although investing requires taking risks, it promises higher returns. Most savings accounts offer an interest rate that is below the inflation rate. Essentially, your money could actually lose value over time.

Once you have saved enough money for emergencies, you should consider building an investment portfolio to ensure you don’t miss out on the opportunity of growing your money.

READ: 6 steps you need to take to make your first million in your 20s

5. You will reach your financial goals faster

Achieving your financial goals takes time, but investing can help you lower that window. 

During your lifetime, you will have many financial goals to chase. And all of them require different investments.

If you don’t start building a solid portfolio for each of them early, you will have no option but to put off some of them later.

Let’s look at an example.

Person X is a 45 years old logistic manager. Since he was 30, he’s been earning over Ksh60,000 and currently makes double that.

But Person X has never had a growth mindset. He has substantial emergency savings that could last him and his family two years if something goes wrong.

He also has a pension fund and recently joined a Sacco to save for a house downpayment. But overall, he’s a spender with that YOLO mindset.

Person X quickly realised that he would never be able to afford a mortgage, at least not in the short term.

Two of his three kids are joining high school next year, and in the next eight years, most of the money he could save will go toward educating his children.

Since Person X didn’t invest in his kids’ education or homeownership early, he had to give up his dream of owning a house to educate his children. 

Try and be better than Person X, just facts.

6. You will reach your earning potential

You must reach your earning potential to achieve your goals or live a financially fulfilling life.

Working hard and saving to achieve that is possible, but it can have some drawbacks. You will have less time for personal stuff, affecting your relationship with your loved ones.

You will need to find a mix of working hard and working smart. 

Reaching your earning potential requires creating multiple passive income streams. And to get to that point, you need to start investing early.

It takes time for your investments to start paying off. Once your investment turns profitable, you will have money to reinvest and money to spend.

You won’t be so reliant on a salary, which can give you the confidence to start your own business.

Self-investment is one of the best ways to reach your earning potential early.

You can grow and command a higher salary if you start pursuing higher education early and learning new skills.

Additionally, if you are relatively young, you can take the risk of switching careers and taking a path that will earn you more money.

7. You can bounce back from mistakes

Investing is a steep learning curve, and nobody is born a pro.

People often procrastinate their decisions to invest, but in doing so, they deny themselves the ability to learn.

One excuse that will hold you back is, “I will start investing after I have saved enough.”

But if you don’t know what enough is, you will get comfortable and let time pass by. 

Suddenly you will find yourself on the brink of retirement with no source of income. 

Investing early gives you a chance to fail, learn, and recover. If you were to start investing after retirement, you would have little room to make mistakes.

And this is despite the fact that you will be more prone to mistakes since you don’t have any experience investing. 

Let’s say; for instance, you have saved Sh. 10 million upon retirement and want to invest in real estate.

With no prior experience, you get conned while trying to buy apartments. Overnight you will have no money and will still need to generate income. 

Even if you choose to start fresh, you will struggle to bounce back to that level. You will have only one option.

Get back to your job and work for a few more years, and when you can no longer work, start depending on your children. 

If you start investing early, you can take risks, and if it doesn’t materialise, learn a few lessons and bounce back.  This is because time is on your side.

8. You have fewer responsibilities

The older you get, the more financial responsibility you assume.

Once you reach your late 30s or early 40s, you will have more people depending on you, which can pressure your finances.

You will have less money to save or invest and no window to take risks. 

Starting to invest when you are relatively young with fewer responsibilities allows you to take risks that will ensure you safeguard your future. This is because you will have more extra money to commit to investments.

Additionally, you have the time and money to invest in yourself when you are young. If you do that, you will have enough experience and certificates to push you up the corporate ladder.

This ensures that you will work less and earn more as you age. With the extra time and money, you can afford to invest more to finance your increasing responsibilities. 

9. You will have peace of mind

Financial stability and peace of mind go hand in hand.

You are stable when in total control of your finances and are not living paycheck to paycheck or struggling with debt; when you are on track to achieve your goals and have good money habits.

But when you have to worry about money or losing your income, you will be stressed and lack peace of mind.

The biggest risk you face as you get older is loss of income, which can prevent you from providing for yourself and your dependents.

But if you start investing early, you make yourself immune to the effects of loss of income. This is because you will have other sources of income you can fall back to. 

And that’s not all. Investing early involves buying the right insurance, like disability and income protection insurance. But most importantly, life insurance. 

If you invest in a life insurance cover when young and healthy, you will pay less in premiums, and upon your demise, your dependents will receive a higher payout.

Some life insurance policies are bundled with education insurance to ensure you never have to worry about your kids’ education. 

10. You can retire early

To retire early and pursue your passions, you must start investing as early as possible. This will allow you to live a stable life, accumulate wealth, and achieve financial independence. 

Once you have enough solid investments that will generate enough income for as long as you are alive, you won’t have to work until you are 70.

You will have the luxury to leave the workforce whenever you see fit. However, if you wait until your 50s to start investing, you will likely keep working, even if you retire from formal employment. 

About the Author
Joshua Kalata

Joshua Kalata

Actuary and Blogger

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