Dan Kline: Hey,there! I’m Motley Fool contributor
Dan Kline, and on this episode of FAQ, we’re talking about when you should start investing,
and how starting as soon as you can will help with all your long-term financial goals.
In most cases, the best time to start investing is now, but there’s one big caveat: you should
pay off any high-interest debt before investing. What counts as high interest? Anything over
the 9% to 10% annualized return you can expect over the long term from investing. Those returns,
of course, aren’t guaranteed, but that’s historically what has happened when you factor in stock
prices rising and dividends. So, before you start investing, pay off your credit cards,
personal loans, and payday loans if they’re over that threshold. Boy, I hope you don’t
have any payday loans. After that, it’s time to figure out how much you can invest.
To decide how you should invest, you need to do one major thing first, and that’s make
a budget. Examine how much money you have coming in and how much you have going out.
Break down your mandatory expenses like rent or mortgage, car payments, food, utilities,
and any other pay-every-month bills that you have no choice about. Then look at your discretionary
spending — things like entertainment, eating out. Ideally, you will have a surplus,
and that’s money you can invest. Of course, that does not mean you should only invest that money.
You may want to tweak your budget and make spending cuts in order to be able to
put more into your investments. You may also consider taking on a second gig or a side
hustle to further your long-term financial goals. Once all of that’s settled,
it’s time to start investing, and that can be a bit terrifying.
The stock market isn’t something most people think about on a day-to-day basis, and much
of the news about it focuses on the extremes. It’s important to remember what stocks are:
they’re shares of individual companies. You may not be able to read a balance sheet,
and you probably don’t read quarterly reports, but you do have brands and companies that
mean something to you. Start there. We’re not going to fully go into how to start investing.
That’s a broader topic for a different episode. But when the time comes, remember the old
adage that you should buy what you know. I, for example, own shares in Apple and Microsoft,
two companies that are part of my everyday life life that make products I love. New investors
should also be aware of index funds. An index fund is a collection of stocks
designed to match a market index, like the S&P 500. This lets you invest your money
broadly, with performance not dependent upon any one company but the market as a whole.
This is a great way to get started without having to become a stock market expert.
However you start, the most important thing is that you do start, and that’s because of
the magic of compounding. OK, it’s not really magic, but compounding can work wonders if
you start early. What is compounding? It’s the concept by which your money grows over
time because you’re not just experiencing growth on your original investment,
but on any gains it has made. Imagine if you buy shares in a company that sells robot-produced
pizza and coffee — we’ll call it Robo Joe & Pizza. If that company grows by the market’s historical
average of around 10%, a year one investment will be worth $1,100 at the end
of the year. A year later, assuming the same 10% growth, your investment will be worth
$1,210. It starts slow, but after 10 years, you’ll have $2,594. In 15 years, you’ll be
at $4,177. Of course, the stock market isn’t that predictable. Your portfolio won’t increase
by 10% exactly each year. But over time, this is generally how compounding works.
Invest early, and your money will go to work for you. Over time, relatively small gains can
produce a big balance in your retirement account. Using a simple compounding interest formula
that assumes a 10% gain, $1,000 invested at 20 would be worth $72,890.48 at age 65.
Shorten that timetable from 45 years to 20, and it’s only worth $6,727.50. That’s why investing
isn’t something you should put off. It’s a lot easier to meet your
retirement goals if you start early. You don’t have to be a genius or even pick
individual stocks. You can buy index funds. And, like one of those rotisserie cookers,
set it and forget it. Of course, while a chicken might take a few hours to cook, your portfolio
will be decades, but it’s still the same principle. Start early and you won’t
have to work as hard later. Thanks for watching this video! We’ve got
plenty more like it coming. Just hit the subscribe button down at the bottom right and give us
a thumbs up. If you have any questions on things I hit in the video, drop them in the comments
section below. We love getting ideas for future videos!