Set yourself up when you're young and build good savings habits.
Most people learn best by doing something. That hands-on experience, called Kinesthetic learning, allows people to practice whatever it is they’re working on. When you were learning how to walk or write or ride a bike, you were using Kinesthetic learning.
Investing is no different. Starting when you’re young, when you don’t have a lot of money, is the perfect way to learn. By starting early in life, you can determine which investment strategy works best for you. You can start to understand your tolerance for risk and you have more time to recover from any mistakes you make. Investing also has a learning curve. Whether you are saving for a home or a vehicle, for retirement or even to build your own emergency fund after the COVID crisis, starting early puts you WAY ahead of your peers who may not start investing/saving until much later in life. You have time to learn about diversification, risk vs return, asset allocation and asset location.
Often, beginners attempting anything will make mistakes - beginner investors often do these things...
· They put all their eggs in one basket.
· They don’t understand that there are different types of risks and returns.
· Beginner investors hold too much of one type of asset, like purchasing 100% stocks.
· Or they hold assets in accounts that aren’t the most tax efficient, like holding US stocks in a TFSA.
Getting sound advice may help with many of these situations however, the point is - the sooner you start, the sooner you learn what works for you, what your feelings around gains and losses are and what helps you sleep at night.
The Power of Compound Interest
Let’s suppose three different people invest $5,000 monthly and earn a 5% return until they are age 65.
The first person saves $5,000 each year from age 20-26 will end up with about $245,000 at age 65. This from just $35,000 in contributions.
Another person saves $5,000 each year from age 25-35 will end up with approximately $215,000 at age 65. They’ll end up with less money even though they made $50,000 in contributions.
The last person, who saves $5,000 each year from age 45-65 will end up with about $165,000 at age 65. Even though they made $100,000 in contributions, $65,000 MORE in than the young saver, they end up with less.
Saving when you’re younger, even if it’s a little bit, will let you benefit from the power of compounding. $5,000 a year is less than $100 per week or $13.75 a day - very achievable.
Saving when you’re young creates a habit. This habit is, in my opinion, the most important reason to save when you’re young. It will create a foundational habit that will benefit you when you’re earning more.
If you spend 100% of your paycheck when you’re young, you won’t build the budgeting and saving skills you need when you’ll be earning more.
When you do begin to earn more money, it’s going to be easy to keep doing what you’ve always been doing, spend 100% of your paycheck.
When building a saving habit, you’re going to learn many things. You’re going to learn how to track your spending. You’re going to learn how to prioritize your spending. You’re going to learn how to budget your monthly income and expenses. You’re going to learn how to pay yourself first. These are all skills you can learn at any point in your life but they’re much easier to ingrain early when you’re making a smaller income and have fewer demands in life.
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