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The more money you invest at a young age, the better. Read on to see why.
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To be able to invest money in a brokerage account (or another account), you need to spend your money carefully and do your best to make sure you have some left over to put to work. And if you’re a younger member of the workforce, finding the funds to invest with might be a struggle.
First of all, inflation has been wreaking havoc on consumers for the past couple of years now, so you may be having a hard time not spending down your entire paycheck by virtue of that alone. Also, when you’re younger, you may not earn the same paycheck as someone with more work experience under their belt. And the less you’re paid, the less money you’re likely to have to invest.
It may therefore surprise you — in a good way — to learn that Generation Z invests $5,522 a year on average, according to recent data from Empower. Now, this doesn’t mean you should feel bad if you only invest about 10% of that total, or if you’ve yet to even begin investing at all. But if you are able to ramp up on the investing front, doing so while you’re young could really work to your benefit.
It’s all about the power of time
When you invest money, whether in a brokerage account, IRA, or somewhere else, you not only get to grow your funds into a larger sum, but you also get to reinvest your gains for added growth. It’s a concept that’s known as compounding, and it’s what allows many people to gain wealth over time.
The best way to use compounding to your advantage is to give yourself a long investment window. And that’s why pushing yourself to invest at a young age is important.
Let’s say you’re able to invest $5,500 this year alone, and you’re 25 years old. The stock market, over the past 50 years, has delivered an average annual return of 10% (before inflation), as measured by the percentage of the S&P 500 index. If your $5,500 is able to generate that same return, in 50 years from now, you’ll have about $646,000. That’s a gain of over $640,000.
But the shorter your investing window is, the less you get to benefit from compounded returns. Going back to our example, if you were to first invest $5,500 at age 35, in 40 years, you’d have about $249,000, assuming that same 10% return on your money. That, too, is a very sizable sum of money and a very impressive gain. But it’s not nearly as high as the gain you’d be looking at for a longer investment window.
Do your best, but aim to ramp up
If you’re a member of Gen Z, you may not have that much income at your disposal to buy stocks or other investments with. But in that case, try to do your best to carve out a little money for investing purposes. It may be an extra $50 one month or $100 another month. And all told, you may not be able to get close to investing $5,522 a year. But that’s really okay, as long as you’re investing something.
It’s also worth noting that $5,522 a year figure could be skewed by a small percentage of really high-paid Gen Zers who have the flexibility to part with that much cash for investing purposes. So if you and the people in your social circle who are your age are largely investing only a fraction of that sum, it really doesn’t mean you’re doing badly.
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