Guest post by Young with Money. I don't think there's ever been any doubt about the wisdom of investing your money. As a young person, however, you have a big advantage by getting started early. In this article, I give you 3 reasons why it's a good idea to start investing early.
You're probably aware that compound interest is attractive, but do you realize how attractive it really is? Everyone talks about how the earlier you start, the better it is, but how much of a difference does it make?
Let's take an example where 1,000 DKK per month is set aside at an annual interest rate of 7 percent. What could it amount to?
Over 5 years, DKK 1,000 a month becomes just under DKK 74,000, of which you have invested DKK 60,000. That's not exactly flashy. So in 5 years, your return will be about DKK 14,000.
If we double the time horizon to 10 years, then the same 1,000 DKK per month instead becomes about 177,000 DKK, of which you have invested 120,000 DKK. By doubling the time horizon, you almost quintuple your return. Now it's starting to look like something.
If we put the time horizon at 20 years, then it starts to get really fun. Here, DKK 1,000 a month becomes a total of DKK 526,000, of which you have invested DKK 240,000 yourself. Now it's suddenly bigger than your original investment, with a return of around €286,000.
As you can hear, you get more benefit from interest the longer that your money is invested. That's a big incentive to get started early, as just a few years can make a big difference in the long run. By the same token, you don't need to invest as much if you start early.
As you could read in the section above, there are great financial benefits to starting to invest early. There seems to be no doubt about that. Another reason why you should start early is to create a healthy financial habit.
Living paycheck to paycheck, your personal finances are really exposed. An economy that is pushed to the limit every month is not a healthy economy. Here, investing can be a great motivation to save extra money, which can then be invested. By getting into the habit of putting money aside early in life, you can prevent a lot of challenges.
It's not necessarily about how much you put aside, but that you just get used to putting money aside. The amount can vary from month to month, but it's about building a habit where you don't spend all the money you have available.
When you invest, you also have the advantage that you will slowly build up a fortune. Therefore, your finances will have a solid ballast to withstand unforeseen expenses.
When I started investing, I didn't have my strategy straight at all. I didn't know how I wanted to invest or what I wanted to invest in. Unfortunately, this led me to make a lot of bad decisions, which cost me a lot of money at the time.
Fortunately, the amounts involved were small. By getting started early, before I had it all under control, I made a lot of small mistakes that I have been able to learn from. By making all the beginner's mistakes in the first place, you'll be better equipped to make the right decisions with the big amounts.
So the big advantage of fixing your mistakes early is that it's significantly cheaper for you. If you make your mistakes only after you have invested a large amount of money, it can easily become very expensive. Of course, you should try to make as few mistakes as possible, but the ones you do make, you should learn from. However, remember to learn from other people's mistakes too, so you can get through them in the best possible way.
If you don't know what to invest in, read more about what to invest in here.
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Historical returns are no guarantee of future returns. The money you lend to projects can therefore increase or decrease in value and there is no guarantee that you will get back the full amount lent.
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