Starting Early

The Power of Starting Early: Why Time is Your Best Friend in Investing

**This post should not be taken as advice. Before you invest, seek impartial and expert advice.**

Three main factors impact the return you get from investments; time in the market, the rate of growth, and the amount you regularly invest.  Many people, at least in my experience, seem to think that the amount you invest each month is the most important determiner of when you can retire.  In order of importance, time in the market and the rate of growth are much more important than the amount you invest.  For example, for time;

If you invest £100pm for 40 years at 8% growth, you will end up with approximately £349,000.  

However, if you invest £1,000pm for 10 years at 8% growth will result in a pot of approximately £183,000. 

Investing a tenth of the amount for just four times longer, gets you almost double the amount.  Starting early, even with a relatively small amount of money, can be life-changing. 

With this example, you can see why many investors believe in one universal truth: when it comes to investing, the earlier you start, the better. Whether you’re saving for retirement, a home, or financial independence, time is your greatest ally.

For the rate of growth;

If you invest £100pm for 20 years at 8% growth, you finish up with approximately £59,000.

However, if you invest £100pm for 20 years at 4% growth you would only end up with around £36,500.  

On the other hand, with the same numbers except for 12% growth you would be sitting on almost £100,000. 

You still need to be mindful of the percentage rate of growth, but it’s still not as important as the total time you are invested.  To invest for longer, you need to start early.

The Magic of Compound Interest

Compound interest is often called the “eighth wonder of the world” for a reason. It’s the process of earning returns on both your initial investment and the gains that accumulate over time. The longer your money has to grow, the more exponential the growth becomes.  Let’s look at another example from a different perspective.

Example of Compound Growth:

Imagine two investors:

Investor A starts investing £200 per month at age 25 and stops at age 35, contributing for just 10 years (£24,000 total).

Investor B starts investing £200 per month at age 35 and continues until age 65, contributing for 30 years (£72,000 total).

Assuming a 7% annual return:

By age 65, Investor A will have approximately £280,000.

By age 65, Investor B will have approximately £244,000.

Despite contributing far less, Investor A ends up with more money because they started earlier, allowing compound interest to work its magic.

Time Reduces Risk

Investing early provides you with a longer time horizon, which helps mitigate risks associated with market volatility. Over decades, the stock market has consistently trended upward despite short-term dips. Starting early allows you to ride out market volatility because short-term downturns are less impactful when you have decades to recover.  An early start also allows you to invest more aggressively as younger investors can afford to take on more risk (e.g., higher equity exposure), which often leads to higher returns over time.

Small Amounts Add Up Over Time

Starting early doesn’t require massive contributions. Even small, consistent investments can grow significantly over time thanks to compounding.

Starting Early vs. Playing Catch-Up:

Investing £100pm starting at age 20 can grow to £380,000 by age 65 (assuming 7% returns).

Waiting until age 35 to start requires £300pm to reach the same approximate amount by age 65.

Starting early reduces the pressure to save large amounts later in life, making the process less stressful.

Building Financial Habits

Starting early helps you develop disciplined financial habits that will serve you for a lifetime:

Consistency: Regular investing becomes second nature.

Budgeting Skills: Allocating money for investments encourages better money management.

Emotional Resilience: Early exposure to market ups and downs teaches patience and long-term thinking.

Time Creates Opportunities

When you start early, you have extra flexibility.  You can take breaks if needed, such as when there are unexpected expenses.  You can also explore different strategies with decades in front of you rather than years.

How to Start Investing Early

Educate Yourself: Learn the basics of investing, including asset classes, risk tolerance, and diversification.

Start Small: Even a few dollars a month can make a difference. Platforms like robo-advisors and micro-investing apps make it easy to begin.

Take Advantage of Tax-Advantaged Accounts: Contribute to accounts like ISAs, and other accounts that offer tax savings.  Pensions offer some tax relief, but this can vary depending on personal circumstances.  You should seek expert advice on your own circumstances to see what the best approach is.

Automate Contributions: Set up automatic transfers to your investment accounts to ensure consistency.

Invest for the Long Term: Focus on low-cost index funds or ETFs that offer diversification and long-term growth potential.

Final Thoughts

Starting early in investing is one of the most powerful decisions you can make for your financial future. The combination of compound interest, reduced risk, and good habits sets the foundation for long-term success. Remember, it’s not about timing the market; it’s about time in the market. So, take that first step today and your future self will thank you.

However, before you invest you should take the time to make sure you understand what you are doing.  Seek expert advice if you are unsure about investments, or your general financial and tax circumstances.  Do not invest until you have researched your options and unique circumstances.  If you invest without understanding, you are gambling.  When you gamble, the house always wins.

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