Investing early versus investing late

Since financial markets fluctuate constantly, no matter when you begin funding your investment plan you can expect to see the value of your mutual funds rise and fall on an ongoing basis. But over time, the historical long-term trend of investments has been positive. In the stock market, for example, the S&P 500^® Index has posted an average annual return over the past 50 years of about 11%, assuming dividends are reinvested. The S&P 500 Index tracks the values of large-cap companies. Your returns could vary year-to-year, as past results are no guarantee of future returns.

There is a very powerful reason for investing early—an early start could enable you to build a bigger portfolio at a fraction of the cost. Waiting for the perfect moment to start may end up costing you.

The chart shows the difference that early investing can make over time. If you began investing $100 a month right now and continued doing so for the next 10 years—and then never invested again—you could still earn more over the next 50 years than if you had waited 10 years to start, and then invested $100 a month for 40 years.

A monthly investment of $100 over the next 10 years—a total of $12,000—would grow to $283,973 after 50 years, assuming an average annual return of 7% without calculating for fees and expenses. If fees and expenses were included, returns may have been lower. By contrast, waiting 10 years and then investing $100 a month for the next 40 years—$48,000 in all—would grow to just $264,012. In this example, that would be an extra $19,961 earned for the investor who started early and spent less.

How much should I invest per month?

It’s a common myth that you need a few thousand dollars to begin investing. It actually works in your favor to start investing early—even with as little as $100 a month—rather than to wait until you have a few thousand dollars saved up. Although investing involves risk, through time and the power of compounding, as shown in the chart above, your $100-a-month investment may contribute significantly to larger financial goals.

In the example, an investment of $100 a month is used to highlight how little is needed to start investing to accomplish the potential of nearly $300,000 in 50 years. What’s important to keep in mind is what your end investment goal needs are. For example, $300,000 may be enough toward purchasing a house or paying for a wedding for your grandchildren, but probably isn’t enough to cover your retirement. If your end investment goal has a higher value, starting off with the $100 investment is a good way to get started, but you may also want to increase that monthly investment value as your income grows.

In the real world, investment performance varies from year to year. Also, in the real world, taxes could factor into the final results. It’s important to remember that investing involves risks, including the possible loss of principal. Your investment decisions should be made based on your specific financial needs, objectives, goals, time horizon and risk tolerance, which may change over time. While the example shows the value of investing early, your potential to build wealth is even greater if you start early, increase your investments and continue investing throughout your earning years.

It’s never too late to start investing, but starting sooner may make reaching your financial goals considerably easier—and cheaper.

To quote an old Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”