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I should have started investing earlier. Read on to find out how time and compounding interest can work on your side. [[{“value”:”
Not many people get through their life without having some financial regrets. Maybe it’s a car you bought that was too expensive, a money pit home renovation, or spending too much on a family vacation that wasn’t worth the cost.
But while many financial regrets have to do with spending money, one of my biggest regrets so far is not saving money and investing it early enough in my working career.
I missed out on the benefits of compounding interest
I worked for a while before I paid any attention to setting aside money for my retirement. I didn’t know much about investing and thought little about my long-term financial needs, so I didn’t devote much mental energy or money to it.
That was a mistake, and nothing drives that point home better than looking at the power of compounding interest to turn a little money into a lot of money. Let’s take a look at a hypothetical example of a worker who begins investing right away and does so for the next 25 years, compared to someone who waits 10 years into their career to get started:
The chart shows that 10 additional years of investing could earn 2.5 times more over your investment horizon!
I picked a 7% rate of return because that’s about the historical average rate of return of the S&P 500 after accounting for inflation. I also chose $223 in monthly contributions because Americans’ average savings rate was 4.5% in 2023, and for someone with a median U.S. salary of $59,384, that savings rate equals about $223.
Related: Before you get started investing, make sure you have an emergency fund. Click here to see the best high-yield savings accounts for a rainy day.
How to get started with investing
One of the biggest hurdles to investing is that many people don’t know where to begin. Here are a few basic steps to get started.
1. Open a brokerage account
A brokerage account allows you to buy and sell stocks. Many investing apps are linked to brokerage accounts. When you open the account, you can even choose whether or not you want to set it up as a tax-advantaged account, like an individual retirement account (IRA).
We did the homework for you. Click here to see our complete list of best brokerage accounts.
2. Pick an index fund that tracks the S&P 500
You don’t need to be an investing genius to buy stocks. In fact, one of the best ways to invest is to buy an index fund that gives you a small stake in 500 of the biggest publicly traded companies in the U.S.
When you buy an S&P 500 index fund, you spread your money across a wide range of companies. This helps you reduce some volatility in your investments and allows you to benefit from the S&P 500’s gains. Historically, the S&P 500 has gained 10.2% on average, and after accounting for inflation, that works out to gains of around 7%.
I don’t think too much about my past financial mistakes. I can’t go back and change them anyway, so there’s no point in spending too much time thinking about them. The best way forward is to learn from our mistakes and let them impact how we make new decisions.
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