What is The Best Age to Start Investing?

In general, you want to start investing when you are young. The reality is that building wealth the traditional way by investing in things like the stock market takes time. If you were to put $5,000 into the stock market, and it went up by 10% for the year, you would have made $500 off of your initial investment.

This does not sound that exciting. However, if you were to invest $5,000 into the stock market every year for 20 years, your money would grow significantly. The reason for this is that your investments would have been growing for 20 years thanks to compound interest.

We are going to look at two different examples that will illustrate how investing early can have significant impacts on your wealth. For the first example, we are going to assume that you are currently 25 years old and want to invest for your retirement at age 65.

Let's assume that you plan on investing $500 per month into the stock market during that time, and can get an actual return of 9% per year. You are obviously not going to get a positive return every year as the stock market goes up and down, but over a long period it is likely the stock market will go up if you own good companies.

Using the assumptions above, you would have just over $2 million when you retire as shown by the graph below. During that 40 year period, you contributed $240,000 and the 9% annual return made you just over $1.75 million thanks to compound interest.

For the second example, let's keep the assumption that you are going to invest $500 per month into the stock market and can get a return of 9% over time. You have the same investing goal of saving for your retirement at age 65.

However, instead of getting started at 25 years of age, you wait to start investing until you are 35 years old. Using the assumptions above, you would have just over $800,000 when you retire at 65 as shown by the graph below.

Simply by waiting to start investing 10 years later, you cost yourself about $1.2 million. In the first example, you contributed $240,000 to the stock market and in the second example, you contributed $180,000 to the stock market.

This is only a $60,000 difference. However, because your money was in the stock market 10 years longer in the first example, it had more time to grow. The point here is that if you wait to start investing, you can quite literally cost yourself hundreds or thousands or even millions of dollars.

The reality of investing is that you need excess income to invest. If you have a low paying job, such as a minimum wage job, it is going to be very challenging to find the money to invest as you likely only have enough to cover some basic bills.

For this reason, it can be more worthwhile to invest in yourself first before investing in something like the stock market. For example, say that you are currently 18 years old and are considering investing. If so, good for you as most individuals at this age do not understand anything related to investing.

Since you are so young, the only jobs you can likely get are low paying, low skilled jobs. If you go and start working in one of these jobs, it is going to be hard to find the money to invest. Instead what you could do is invest in yourself to increase your income potential.

This might include going to college, going to trade school, getting a certification for a particular job and more. If you do one of these, you can come out making $60k to $70k per year as opposed to $30k or $40k per year.

When you double your earning capacity, it will be easier to find excess money to invest. Before you start investing, ask yourself if your time would be better spent trying to increase your earning capacity? This will usually be true if you are quite young.

Keep in mind that if you use this strategy, you must have the discipline to invest once you increase your earning capacity. For example, say that you currently make $40k per year and are used to spending all of your money.

If you were to increase your earning capacity to $70k per year, you will have excess income. Since you are used to spending all of your money, it can be tempting to increase your lifestyle with your increased income. You need to have the discipline to set aside some of your money to invest once you increase your income.

When you are young, building the habit of investing is more important than the dollar amount you invest. Above, we discussed how you can focus on increasing your earning capacity before you invest. However, we also discussed the risk of increasing your lifestyle as your income increases.

For this reason, you should focus on building the habit of investing even if your income is low. This can be as small as $50 or $100 per month. For example, say that you are 22 years old and just graduated college. You have your first job out of college that is going to pay you $60k per year.

You are transitioning into a new stage of life and will have a lot on your plate. You might have student loans that you need to pay off. With that being said, if you can set aside a small amount of money each month to invest, you will build the habit of investing. As you earn more money in your life, you can increase the amount of money you invest.

The good news is that you can typically start investing once you are 18 years old in the United States. This means that your age will not hold you back when you want to start investing. Once you are 18, you can open a variety of investing accounts through an online broker in a matter of minutes.

Once your account is approved, you can start buying investments, such as stocks, through the account. If you are younger than 18 years old, there is still a way you can invest. You can have your parents or guardian open a custodial account for you.

Your parents will own the account and control it until you are 18 years old. At that point, the account transfers to you. For example, say that you are 16 years old and want to start investing. If you have a job, you could ask your parents to open a custodial account.

If you have an extra $100 per month from your job, you could give it to your parents to invest on your behalf. On the flipside if you are a parent and want your kids to get a jump start on investing, you can open one a custodial account.

Regardless of your age, you need to create an emergency fund before you start investing. An emergency fund is a cash reserve that you can access to pay for unexpected emergency expenses. If you invest before you create an emergency fund, you may have to sell your investments to cover unforeseen expenses.

For example, say that you had $1,000 in your bank account and invested it in the stock market. A few months go by and your car breaks down. Since you don't have any liquid cash, you have to sell your investments to pay for the expenses to get your car fixed.

In general, you want to have a minimum of $1,000 in cash before you start investing, but a better goal is to have 3 to 6 months worth of expenses saved up. Once you have built up an emergency fund, it will be much easier to start investing as you have a safety net.

Regardless of your age, you also need to make sure you have proper insurance coverage before you start investing. Like emergency funds, insurance coverage is another financial safety net that you need to have in place before taking on the risks of investing.

If you don't have proper insurance coverage, you can expose yourself to all sorts of financial problems including lawsuits. For example, say that you only carry the minimum legal requirement for car insurance. You then go out and cause an accident that causes damage to another driver's vehicle and injuries to their body.

Your car insurance would pay out up to the limits of the policy. However, if the damages of the accident exceed the limits of your insurance policy, you are still on the hook for those expenses. If you are not able to pay for those expenses, you can be sued.

This may result in your wages being garnished or your personal property being sold to cover the damages you caused. The point here is to make sure you have proper coverage on all insurance policies before investing.

You can work with your insurance agent to figure out how much coverage you need on your car, renters, homeowners, life, and umbrella insurance policies. Insurance is not a product in which the cheap option is the best option.

Finally, you need to pay off high interest true debt before you start investing regardless of your age. True debt is any financial obligation in which the only way you can pay it back is from money you have to earn. Common examples of true debt include credit card, student loans, and personal loans.

If the debt costs you more than what investing could earn you, it makes more sense to get rid of that debt before you start investing. For example, say that you were irresponsible with a credit card and had racked up $2,000 of credit card debt at a 20% interest rate.

If you were to invest in the stock market, you would likely only earn a 10% return. In this scenario, it makes sense to pay off the credit card debt before you start investing. Once that high interest debt is paid off, you can start investing.

On the flipside, if your debt costs you less than what your investments could earn, you can invest at the same time as you pay off the debt. For example, say that you have $20,000 worth of student loans at a 4% interest rate.

If you invest in the stock market, you may be able to earn around 8% to 10% over time. Since you can earn more money investing, it does not make sense to pay off your student loans as fast as possible. Instead, you can invest at the same time as you pay down your student loans.

The first step to investing regardless of your age is to open an investing account. An investing account is not an investment itself, but instead holds your investments. There are a variety of investing accounts you can open, but a good one for a beginner is a Roth IRA. You can open one through an online broker.

A Roth IRA is an account designed to help you build wealth for retirement. The account allows you to contribute after tax dollars, but when you pull the money out in retirement you pay zero taxes. There are eligibility requirements you must meet to use a Roth IRA. You can learn more about those here.

Once your investing account is approved, you need to buy investments through that account. There are a wide variety of investments you could choose, but a beginner friendly one is index funds. Index funds are investment funds that seek to replicate or mirror the performance of a financial index.

A popular type of index fund is an S&P 500 index fund. The S&P 500 index measures the performance of the top 500 companies in the US. It is often used to gauge how the stock market is doing as a whole. When you buy an S&P 500 index fund, you get exposure to the top 500 companies in the US.

Buying an S&P 500 index fund is an easy way to start investing as you don't have to pick individual stocks. Some popular S&P 500 index funds include the Fidelity 500 Index (FXAIX), the Schwab S&P 500 Index Fund (SWPPX), and the Vanguard S&P 500 Index Admiral Fund (VFIAX).

Each of these funds could be good options to start with. Keep in mind that these funds are only examples of what you could invest in and that you should not take this information as financial advice. The funds that are right for you may be different.  

Finally, you need to be consistent with your investing. In the short term, the stock market goes up and down. If you expect to be rich in your first year, you will be disappointed. You need to take a long term approach to investing since the stock market historically goes up over long periods of time.

If you invest and the stock market goes down, don't panic and keep investing. A good way to invest consistently is to set up an auto draft each month. Review your budget to see how much you can invest and then set up an auto draft so that money is automatically invested for you each month.

The bottom line is that it is generally a good idea to start investing as early as possible. When you invest sooner, your money has more time to grow and you can invest more money over time. If you don't have excess money to invest, focus on investing in yourself first to increase your earning capacity.

Before you start investing, make sure that you create an emergency fund, have proper insurance coverage, and pay off high interest true debt. Once you have taken care of these, you can open an investing account, but index funds through that account, and invest consistently.