When should you start investing your hard-earned money? That’s a tough question. The answer to it really depends on you and your life situation.
As a Teenager you probably aren’t worried about investing, but before you know it could be too late
If you’re reading this article, you’ll probably have some big pressures on your time, and your wallet, coming up. School is expensive. Student loans aren’t fun.
Is it better to get some money working for you in an investment account or to pay down a student loan?
What’s the best way to save for your education?
How can you you set yourself up for financial success in the future?
Whats the best age to start investing your money?
I would say that your best bet would likely be to start investing NOW. Let’s explore why.
Let’s say that you don’t have to worry about the cost of college. When should you start to invest? As soon as possible.
Make Time Your Friend
You’re young. You have the most valuable investment that you can give. Time.
Remember that Time = Money, especially in investing. The more time you give a fund to grow the more money you make.
Taking a pretty small amount of money and regularly investing it can lead to some pretty big gains.
Let’s assume that you’re 18 years old and that you have $100 to spare. Invest that money into something (it really doesn’t matter what, but I’ll get into some options in a later post). It can grow into hundreds of thousands of dollars by the time that you’re ready to retire. A monthly contribution of $100 (which can be made easily through Affiliate Marketing) to an investment plan that makes 6% a year (a pretty conservative guess, because the stock market tends to grow at around 10% a year) turns into $216,885.94 by the time that you’re 58 years old. That’s $166,485.94 of extra money that you didn’t have to do a thing to get. You can find how to save money in college, which you can use to invest, Here
Giving it more time leads to way more growth. Say you decide that you want to let it ride another 7 years, until you’re 65. Using the same growth assumptions and the same monthly contributions, you now have $297,190.89. You’ve made $240,790.89!
The Cost of Waiting
Delaying the start of your saving and investment program can cost you a ton of money. Say that you wait until you are 28 to start investing. We’ll keep the same assumptions ($100/month and 6% growth). Your nest egg would now grow to $97,451.30, or a growth of $61,451.30. It’s still a lot of money, but nowhere near what it could have been. Even extending your contributions until you are 65 won’t help you catch up. The same savings and return assumptions will give you $156,877.41 or growth of $112,477.41. Waiting a decade has cost you $140,313.48!
Check out this Investment Calculator, it can give you an idea of how much money you can make with given the amount of years you wait.
So start investing as soon as possible, even if its $5 a week, in the long run you will be happy you did.
Saving for College – The 529 Plan
If you are looking to save up some money for school, the best way to do it is probably through a 529 Plan. There are two ways of doing it a pre-paid tuition plan or a college savings plan.
- These let you prepay your tuition at state schools, at today’s rates. Let’s say that tuition for a semester is $2,500 and inflation is 2%. By pre-paying the tuition today, you pay $2,500 and avoid the increase. If you’re three years away from your first semester, someone who didn’t do this would be paying $2,653.02. In effect, you’d be saving $153.02.
College Savings Plan
- A college savings plan under a 529 is an investment umbrella that shelters you from paying taxes on the growth of the plan. Let’s keep the above numbers. Tuition for one semester is $2,500, inflation is 2% and you’re three years away from college. Let’s further say that you believe that you can get a 6% return on your investments. If you open a 529 Plan and start investing today, in three years you would have $2,977.54. Tuition would still be $2,653.02. In effect, you’d have an extra $324.52.
The numbers make the choice look like a no-brainer, but there is an element of risk involved as well. If you’re looking to prepay tuition, you have very minor risk. The tuition amount is locked in, it’s prepaid and you begin college after you’ve graduated from high school.
If you’re operating through a college savings plan, you’re assuming that you will be able to get a better return than the rate of inflation of college tuition. If the market tanks and a 6% return is improbable, then you lose your gamble.
If tuition increases at a faster rate than the market does, then you probably lose your gamble. If you are comfortable taking on a bit of risk for the probable payout of a higher reward, then you’re more likely to be drawn to the college savings plan approach.
Having said that, research is key. Talk to a professional about your personal situation before making this decision.
Pay Down Loans or Invest
It is smart to compare rates of return on investments to the interest rate that you’re paying on a loan when making this decision. If you are paying 4% on a loan and making a 6% return on investment, make your regular loan payments and invest what you can. If you’re carrying credit card debt with a 20% interest rate and making a 6% return on investment, pay down the debt and stop making investment contributions until you can get it paid off.
There is a hook though! Generally, student loan interest is tax deductible in the USA. There are some conditions (the loan must qualify; the student must qualify and your income must be below a threshold). That will throw off the calculation based on your tax bracket. If your marginal tax rate (the percentage of your income that goes to taxes on your last dollar earned) is 50%, your effective interest rate is half of what the posted rate is. That is, if you have a loan at 4%, you get to deduct 50% of it, so your effective interest rate is 2%.