You can start saving and investing at any age. When people start investing when they are young, they are more likely to get into good habits that will last for the rest of their lives. If you start investing early, you’ll end up with more money over time. You could start your own business to make more money to invest. Anyone can find money to invest if they look at how they spend their money and make changes.
Part1: Learning the Basics
1. Get going early. If you want to get rich, the most important thing is time. The longer you save and invest, the more likely it is that you will reach your goals and make a lot of money.
Over a long time, you can save more money to invest than over a short time. Even though that may seem obvious, many people don’t fully understand how powerful time can be when it comes to making money.
For example, if you can save $50 a month starting at age 5 (assuming someone else starts putting money aside for you), you will have saved $36,000 by the time you are 65. ($50 per month times 12 months per year times 60 years) or ($50 x 12 x 60 = $36,000.) That doesn’t count any money you make from the money you invest.
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If you started saving at age 50, you would need to save $200 a month for 15 years to reach the same $36,000 by age 65 ($200 x 12 x 15).
If you start investing when you’re young, you’ll have more time to make up for any losses that may happen in the future. When people start investing later, they have less time to make up for any losses. Your investments will gain value again over time.
The S&P 500 is an index of 500 large stocks. Since 1928, the average return has been about 10% per year. Even though the returns have been bad in some years, long-term investors who own this index of stocks have made money.
2. You should add to your savings often. How often you contribute, such as weekly, monthly, or yearly, has a big effect on how well you do in the long run. If you have trouble remembering to put money in your savings account, try setting up a monthly transfer from your checking account (for example, $100 per month).
When you save, you put money into a separate bank account. You keep money separate in a savings account and a checking account for yourself.
This helps you make sure you don’t spend the money you want to save. Then, you can put the money in your savings account into CDs, stocks, bonds, or other investments.
When you save money more often, you can contribute less each time. This can help you fit each investment into your personal budget better. For example, at age 5, you could start saving $12.50 a week (assuming a 4–week month). You could also save $50 a month, which would add up to $600 a year. The amount you invest stays the same, but it’s easier to save when you do it more often and in smaller amounts.
3. When you invest, use compounding. Once you have money in savings, move it as soon as possible into an investment. An investment will give you a better rate of return. Take advantage of compounding when you move money from your savings into a way to invest it.
By adding to your investments over time, they will grow faster, like a snowball rolling downhill. It grows faster the longer it rolls. If you invest more often, compounding will work faster. [2]
When you make investments that earn “interest on interest,” you are compounding them. Over time, you get interest on both the money you put in the beginning and the interest you got on it.
4. Use dollar cost averaging. In any given year, the index value of an investment could go up or down. In the long run, though, the index has given an average return of about 10% per year. You can make money off of short-term drops in the value of an investment by using dollar cost averaging.
When you use dollar cost averaging to invest, you put away the same amount of money every month.
Most of the time, dollar cost averaging is used to invest in stocks and mutual funds. Shares are used to buy both of these investments (stock shares or mutual fund shares).
If the price of a share goes down, you can buy more of them. Say, for instance, that you put away $500 every month. If a share costs $50, you will buy ten of them. Let’s say the share price falls to $25. When you invest $500 again, you will buy 20 shares.
You might pay less per share if you use dollar cost averaging. As the share price goes up over time, your profit goes up if your cost per share goes down.
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5. Allow your money to grow. Compounding is the way that interest on interest adds up when you invest in bonds. For stocks, compounding means making money off of the dividends you’ve already received. In both cases, you should put back into your investments any interest or dividends you get. [4] Both how often and when are important. When compounding happens more often, you get money and put it back into your account more often. The effect is stronger the more often this happens and the longer you let it go on. [5]
For instance, say you start saving $100 a month at age 25 and earn 6% interest. You will have saved $48,000 by the time you are 65. But if you added up the interest on that money every month for 40 years, it would grow to almost $200,000! [6]
On the other hand, let’s say you wait until you’re 40 to start saving, but you decide to put away $200 a month at the same 6% interest rate. You will have saved $60,000 by the time you are 65. But you won’t have as much time each month for your interest to grow. In the end, you’ll only have $138,600 saved for retirement, instead of the close to $200,000 in the first example. You will have saved more money, but after compounding, you will have less.
