Your parents always wished you were a child prodigy, but all those violin/abacus/ballet classes were wasted on you, and here you are, an adult who’s as ordinary as any other. Sometimes you wish your parents had been less kiasu and just let you live a little.
When it comes to investing, however, the earlier you start the better, no ifs and buts. You may not have a special talent for it, but you have to do it anyway. You may not be the next Warren Buffet, but no matter how little you have, you need to start pronto. Here’s why.
1. The earlier you start investing, the less you’ll actually have to save
If you’re a 20-something who thinks it’s hard to save money to invest with now, it’s going to be ten times harder when you’re older, not only because you’ll have more financial commitments, but also because you’ll need to save a hell of a lot more money by then.
That’s because given time, money grows a lot more than you think thanks to compounding interest.
Let’s say you’re earning 5% interest on $10,000—you’ll have $10, 500 after a year. But after the second year, you won’t have $11,000. You’ll have $11,025, because you got 5% on $10,500 and not your initial sum of $10,000.
Doesn’t sound like much, does it?
But let’s fast-forward 20 years—and your initial sum of $10,000 has grown to $26,532.98.
Use this compound interest calculator and see for yourself.
Conversely, let’s say you YOLO for the next 15 years and then want to accumulate the same amount within 5 years. If you only have 5 years to invest the money, you’ll need to save up $20,789 instead of $10,000!
I don’t know about you, but I’d rather save up now and let my money grow than freak out when I’m much older because I need to suddenly cough up half a million in cash before I retire.
2. You can take more risks
There is no such thing as a risk-free investment. Any investment that gives you returns that can beat inflation comes with some degree of risk. The only (almost) risk-free investment scheme we have out there is CPF, and that’s why the interest rate for your ordinary account funds is only 2.5%.
In real life, most younger people should be aiming for returns far higher than 2.5%. But to receive higher returns we take on greater risk. If you invest in stocks, you should know all too well that the market fluctuates wildly in the short term. The advantage of having a long time to go before retirement is that you can afford to ride out the fluctuations and benefit from increases in value over longer periods of time.
If you start saving and investing later on in life, you’d better not try anything too risky, because you may not get to wait 10 or 20 years for the market to bounce back, since you could be dead or at least destitute by then. Low risk usually means lousy returns, which brings us back to our previous point—we hope you suddenly learn to love saving, because you’re going to have to do a lot of it.
3. It’s easier to save when you’re commitment free
Young people who complain that it’s hard to save money now because of their addiction to shoe shopping or craft beer should wait 20 years and see if it gets any easier.
For the vast majority of Singaporeans, responsibilities start piling up as they get older. Once you take out a mortgage for your first home, you’re signing up for almost a lifetime of loan repayments. Then there are car loans and renovation loans for your home.
If you intend to have kids, it’s even more important that you start saving now, because children as we’ve seen can be quite a money sink, especially if you join the brigade of kiasu parents whose kids are enrolled in a litany of tuition, enrichment, ballet, violin, abacus, baby genius, fencing, etc classes.
Many young parents I know carry credit card balances they just can’t seem to pay off, which is even scarier because this is not debt you can get rid of by just sitting home and eating instant noodles for two months—no matter how much you try to scale back your own lifestyle, your dependents’ expenses aren’t always within your control.
The later you start saving for your own retirement, the higher the likelihood that your poor kids will be the ones who’ll have to support you when you’re older.
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