When it comes to investing, it’s never too early to start. If you understand the power of compound interest, the earlier you start investing, the more time you have to achieve your financial goals. However, you have to make sure that you have enough savings and that you have your debt under control. If you want to add to your knowledge, here’s a good book to read: Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business.
What Is Compound Interest and Its Benefits?
Simply put, compound interest occurs when you earn interest on your interest. For example, let’s say you put $100 in an online savings account at 2 percent interest. At the end of the year, your $100 earns $2 as interest. If you keep that interest in the account, it will increase your account balance.
The same principle applies if you were to invest in stocks that pay out dividends. If any time you earn dividends from your shares, you reinvest these funds to buy additional shares, your reinvested earnings will generate additional earnings over and over again.
Thus, because compound interest can significantly increase the value of your savings or investments, the earlier you start investing, the more time you have to benefit from compounding interest.
As Albert Einstein once said, “Compound interest is the eighth wonder of the world.”
Do You Have Enough Savings to Start Investing?
You also have to make sure you have enough cash to start investing. Investing should be a long term goal. Because of the risks involved in investing, money that you will need next month, or money that you will need to buy a house, should not be invested in stocks, but should be put instead in a high interest online savings account.
Look at your budget and see how much money you have in your savings and how much you can afford to invest. Also, make sure you have set aside some money for real emergencies. A good rule of thumb is to have at least three to six times your monthly expenses in your emergency fund.
Are Your Debts Under Control?
Once you have an idea of how much savings you have to invest, the next step is to look at how much debt you have. If you only have good debts, then you’re off to a great start. But if you have a lot of bad debts, it’s important to act quickly and start paying them off as quickly as possible before even thinking about investing. You should start paying off those debts with the highest interest rate.
Understand and Assess the Risks Involved
Investing in the stock market is risky. That means you can invest $5000 today, and lose half of it or everything in a matter of days. So before you start investing, see if you can stomach the risks.
In sum, because of the benefits of compound interest, it’s a good idea to start investing as early as possible. But before doing so, make sure you have enough savings, you have your debts under control and you understand the risks involved in investing.
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