When is it the right time to start investing for retirement? What about saving for a home? Or starting a nest egg for the future?
Most of us have probably asked questions like this of ourselves — maybe when you got your first pay packet or when you had your first child. But the foundation for investing can begin much earlier than that and lead to a stronger financial future. Investing is more than just shares, term deposits and superannuation. It’s fundamental to everything we do.
Lessons that last a lifetime
Who says you need to have a brokerage account or even a driver’s licence to know a little bit about investing? When I was growing up, my mother would give my sister and cousin $2 to spend on anything they wanted every time we went to the supermarket. Talk about some challenging decisions for a 5-year-old child!
Should I get one $2 toy, a pack of gum and some Nerds, or save the money and have $4 to spend next time?
If you think about it, these are decisions we make every day as adults. How much should I spend on food, clothing, a place to live, etc.? There are trade-offs with every one of these decisions, with regards to both our finances and our standard of living. We want to maximize the finite resources we have to the greatest benefit in our lives. This is nothing more than another way of investing.
If you start teaching investing early in life, there are concepts – like return on investment, sunk costs, and compound interest – that transcend looking at stocks. Whether we realise it or not, we use these skills every day.
The maths works out better
Whether it’s in a savings account or superannuation fund, the art of compound interest works better the longer the money is invested. So any amount of money you can invest early in life will pay long-term dividends.
Below, I’ve built a chart that shows how much money can grow over time with a very modest return of 6% annually.
In 10 Years
In 20 Years
In 50 Years
It’s easy to see that starting early, no matter what you’re saving for, pays off in the long run. And adding to your savings periodically is just as important as what you start with.
Where to start
I’ve spent time covering why it’s important to begin investing early, so let’s discuss how to invest early in your investing career. Here are some ideas that wouldn’t be out of place in any portfolio.
- Invest in what you know: Apple (Nasdaq: AAPL). Whether you’re 8 or 80, Apple is a fun stock to own and follow. With iPods, iPhone, iPads, and Macs around the world, few companies are better known, letting you follow Peter Lynch’s sage investment advice. Growing revenue, skyrocketing profits, and a cash pile bigger than some countries also make this a good stock pick for almost anyone. Don’t let its US listing put you off, either – investing overseas is as close as your preferred Australian broker, with almost all of them offering access to the US markets.
- Get some money back from the banks. Whether you bank with one of the ‘big four’ or a local or regional player, you can get them to pay you every six months through dividends. The banks aren’t likely to grow strongly for a while, but they return some pretty attractive dividends. At the time of writing, the trailing yields were 7.5% for Westpac Banking Corporation (ASX: WBC), 7.3% for National Australia Bank Limited (ASX: NAB), 6.5% for both Commonwealth Bank of Australia (ASX: CBA) and Australia & New Zealand Banking Group Ltd (ASX: ANZ) – and each are fully franked, making the dividends even more valuable.
- Pay yourself. Whether you shop at Woolworths (ASX: WOW), Coles, owned by Wesfarmers (ASX: WES), or at an independent IGA store, likely to be supplied by Metcash (ASX: MTS), there’s nothing better than knowing a tiny fraction of each transaction is coming back to you in dividends – and you’re supporting your own company
It’s never too early
The lessons we learn from investing are transferable to almost everything we do in life, no matter our age. Investing teaches us about risk, saving, growth, and financial discipline, among other things. And these lessons are fundamental to what we do at The Motley Fool.
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Scott Phillips Is The Motley Fool’s feature columnist. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Travis Hoium, originally appeared on fool.com