By the time we’re done with our formal education, most of us probably start our first full-time jobs when we’re in our 20s. This is when we start climbing the corporate ladder and hopefully earn enough to afford a good standard of living for ourselves and our family.
While improving our quality of life in the present is important, we should not ignore investing for our future as well. The first few years when we start working is actually the best period for us to start building our retirement nest egg. Here are five good reasons why.
# 1 Head Start In Building Your Retirement Nest Egg
If you’ve ever sat down with a financial advisor or even tried to crunch the numbers on your own, you’d realise that you will need a substantial amount of money for your retirement. In fact, we recently wrote an article about how we may spend up to $1.3 million in retirement if we just joined the workforce as a 25-year old today.
If you start now, you have close to 40 years to plan, save and invest, which will put you in a good position to retire comfortably when the time comes.
# 2 Longer Time Horizon To Benefit From Compound Interest
Inflation will continue to eat away at our spending power and the rising cost of living will gradually make daily necessities more expensive. This is why we should use the same principle of compounding to grow our investments.
When we start investing early, we start compounding our returns as early as possible. This means that we don’t only earn an interest return on our initial investments, but continue to earn interest returns on past interest returns we earn over time.
Doing this over 40 years can be the difference between a comfortable retirement and having to postpone your retirement (against your desires) or requiring support from your children.
Read Also: Why Financial Planning Is A Young Man’s Game
# 3 Ability To Ride Out Market Volatility
If you’ve been following the stock markets or property prices, you’d see that prices can go up or down. They some times fluctuate very drastically, especially during times of economic crisis or booms.
Of course, no one complains about having to deal with a booming market. The problem arises when markets start to tank. If we’re investing over the long-term, we can ride out economic crises and let our investments sit tight while waiting for an economic upcycle.
When we start investing from a young age, we can also plan in advance to gradually move our investments from stocks or properties to bonds or voluntarily contributing to our CPF. With time to plan, we can make better financial decisions rather than overleveraging or panicking when we find ourselves in a bad position later in our lives.
# 4 Understand Investment Opportunities As Early As Possible
Life doesn’t come with a handbook.
It is fair to assume that you’re more likely to make bad investment decisions when you’re first starting out than when you’re more experienced. This also means that if you start young, you’ll be making mistakes when you don’t have much in savings anyway. You also have a long-time to continue earning and rebound from those mistakes.
If you’re in your 50s and you start making mistakes in your investments, they could be very costly as you’d have a much larger savings amount to play with (hopefully) and you also don’t have as long a time to recover from those mistakes.
# 5 You Have A Lot Of Future Expenses You’re Probably Not Accounting For
It’s the first time you’re taking home thousands of dollars, and you may think it’s okay to start splurging on yourself. You may even think you’re being very prudent by planning for a budget wedding and buying an affordable home.
Chances are, if you’re just starting out in life, you still can’t fully appreciate the financial commitments and ups and downs you’ll have to weather over the next 40 years, and also when you retire.
Just to start naming a few – possible further education to improve your career options, having children, and then feeding, clothing and educating them for the next close to 20 years, any possibility of your parents requiring help, unemployment or illnesses down the road, and a host of other uncertainties that could happen.
Start Investing When You’re Young
By starting young, you give yourself the best chance to equip yourself for retirement by the time you want to retire. You’re also constantly gaining knowledge and becoming more financially savvy and prudent.
While you’re raising your family, you can also impart these skills to your children and spouse (if they’re not as interested).