Every young person wants to be wealthy. But, if you have come to grips with the reality that becoming a YouTube sensation is a long shot on your quest for riches, you have probably read somewhere on the Internet that regularly investing your money from a young age is the best way to accumulate wealth. But how can this advice be accurate if you have next to no money to save or invest?
Starting young when building wealth is best because it gives you more time to leverage the power of compound interest. Compound interest is the concept of letting your money work for you by accumulating interest on top of interest.
Although compound interest is the misunderstood phenomenon in building wealth for young people, it is the broader concept of time that is equally powerful. As the only truly finite resource in the world, time is the most valuable asset for people on the path to wealth, and young people have the advantage of more time over older investors.
Why Starting Young When Building Wealth is Best
More time is at the heart of why starting young is best when building wealth. While it gives you the ability to maximize the power of compound interest, there are numerous other reasons why additional time is critical for building wealth.
More Time to Leverage the Power of Compound Interest
First off, more time allows young investors to maximize the power of compound interest. Although people have a rough idea that compound interest is good, few have a true understanding of just how powerful it is.
Compound interest is when you start accumulating interest on top of interest. It passively grows your nest egg without the investor having to do anything at all. It is such a powerful phenomenon that legendary physicist Albert Einstein referred to compound interest as the 8th Wonder of the World.
While compound interest works for any investor, young people can leverage its power over a greater timeframe.
How Young People Can Leverage Compound Interest
To help demonstrate how compound interest can work wonders for young people, let’s compare a scenario in which a person were to get started investing at 18 as opposed to a person starting when they are 30.
In this example, we will start with an initial investment of $1,000 and assume an annual growth rate of 10%. While market returns are never guaranteed, the historic average return for the stock market since its inception has been just above 10%, so we will assume that figure when building our example. In this initial chart, the investor lets the initial $1,000 deposit work for itself and does not add any additional contributions along the way.
| Initial Investment Amount | Age at the End of Investment Period | Growth Rate | Interest Earned During Period | Balance at the End of Investment Period (Initial Investment + Interest Earned) |
| $1,000 | 19 | 10% | $100 | $1,100 |
| $1,100 | 20 | 10% | $110 | $1,210 |
| $1,210 | 21 | 10% | $121 | $1,331 |
| $1,331 | 22 | 10% | $133.10 | $1,464.10 |
| $1,464.10 | 23 | 10% | $146.41 | $1,610.51 |
| $1,610.51 | 24 | 10% | $161.05 | $1,771.56 |
| $1,771.56 | 25 | 10% | $177.16 | $1,948.72 |
| $1,948.72 | 26 | 10% | $194.87 | $2,143.59 |
| $2,143.59 | 27 | 10% | $214.36 | $2,357.95 |
| $2,357.95 | 28 | 10% | $235.80 | $2,593.75 |
| $2,593.75 | 29 | 10% | $259.37 | $2,853.12 |
| $2,853.12 | 30 | 10% | $285.31 | $3,138.43 |
As you can see from this chart, a $1,000 investment at the age of 18 passively grows to $3,138.43 by the age of 30, assuming a 10% growth rate. This will put a person $2,138.43 (or 213.84%) ahead of where they would have been had they started their investment journey with $1,000 at the age of 30.
If this example is not powerful enough, it is what happens over the next ten years, up to the age of 40, that further shows the power of compound interest and time. Using the same 10% growth assumption, the first chart looks at where the person who started with a $1,000 deposit at 30 years old would be by the age of 40:
| Initial Investment Amount | Age at the End of Investment Period | Growth Rate | Interest Earned During Period | Balance at the End of Investment Period (Initial Investment + Interest Earned) |
| $1,000 | 31 | 10% | $100 | $1,100 |
| $1,100 | 32 | 10% | $110 | $1,210 |
| $1,210 | 33 | 10% | $121 | $1,331 |
| $1,331 | 34 | 10% | $133.10 | $1,464.10 |
| $1,464.10 | 35 | 10% | $146.41 | $1,610.51 |
| $1,610.51 | 36 | 10% | $161.05 | $1,771.56 |
| $1,771.56 | 37 | 10% | $177.16 | $1,948.72 |
| $1,948.72 | 38 | 10% | $194.87 | $2,143.59 |
| $2,143.59 | 39 | 10% | $214.36 | $2,357.95 |
| $2,357.95 | 40 | 10% | $235.80 | $2,593.75 |
On the other hand, if someone used their graduation gifts to open a brokerage account with $1,000 at 18 and left it alone until the age of 40, the results would be staggering. We have already seen that the account, after interest, would sit at $3,138.43 at age 30, and we will assume the same 10% growth rate for the following decade.
| Initial Investment Amount | Age at the End of Investment Period | Growth Rate | Interest Earned During Period | Balance at the End of Investment Period (Initial Investment + Interest Earned) |
| $3,138.43 | 31 | 10% | $314.84 | $3,453.27 |
| $3,453.27 | 32 | 10% | $345.33 | $3,798.60 |
| $3,798.60 | 33 | 10% | $379.86 | $4,178.46 |
| $4,178.46 | 34 | 10% | $417.85 | $4,596.31 |
| $4,596.31 | 35 | 10% | $459.63 | $5,055.94 |
| $5,055.94 | 36 | 10% | $505.59 | $5,561.53 |
| $5,561.53 | 37 | 10% | $556.15 | $6,117.68 |
| $6,117.68 | 38 | 10% | $611.77 | $6,729.45 |
| $6,729.45 | 39 | 10% | $672.94 | $7,402.39 |
| $7,402.39 | 40 | 10% | $740.24 | $8,142.63 |
Based on this model that assumes a 10% growth rate, it can be seen that a person starting their investment journey with $1,000 at age 30 will have $2,593.75 by age 40, whereas the person starting at 18 with the same amount will have a whopping $8,142.63 by the time they turn 40. As you can imagine, this gap will only widen throughout the decades, assuming the same 10% growth:
| Initial Investment Amount (Started Investing at Age 30) | Age at the End of Investment Period | Growth Rate | Interest Earned During Period | Balance at the End of Investment Period (Initial Investment + Interest Earned) |
| $1,000 | 40 | 10% | $1,593.74 | $2,593.74 |
| $2,593.74 | 50 | 10% | $4,133.76 | $6,727.50 |
| $6,727.50 | 60 | 10% | $10,721.90 | $17,449.40 |
| $17,449.40 | 70 | 10% | $27,809.86 | $45,259.26 |
| $45,259.26 | 80 | 10% | $72,131.59 | $117,390.85 |
Compared to those who had already accumulated $3,138.43 by age 30:
| Initial Investment Amount (Started Investing at Age 18) | Age at the End of Investment Period | Growth Rate | Interest Earned During Period | Balance at the End of Investment Period (Initial Investment + Interest Earned) |
| $3,138.43 | 40 | 10% | $5,001.85 | $8,140.28 |
| $8,140.58 | 50 | 10% | $12,973.51 | $21,113.79 |
| $21,113.79 | 60 | 10% | $33,649.94 | $54,763.73 |
| $54,763.73 | 70 | 10% | $87,279.28 | $142,043.01 |
| $142,043.01 | 80 | 10% | $226,379.96 | $368,422.97 |
By age 80, those who started with a $1,000 investment at 30 will have a $117,000 nest egg. However, those who began with the same amount at 18 will have a whopping $368,000, demonstrating the power of compound interest when starting to build wealth at a young age.
More Time to Make Contributions
The previous section demonstrated the power of compound interest in and of itself. However, investors need to be making regular contributions to their accounts from a young age to be able to further leverage the power of compound interest.
Like compound interest, even the most modest contributions can add up over time. For example, committing to invest $5 each week, less than the cost of a typical coffee shop drive-thru order, has the power to add up over time.
Without factoring in interest, a $5 weekly investment will add up to $260 each year and $3,120 by the time the investor reaches 30–a nice little chunk for a seemingly insignificant amount of weekly cash.
However, when adding this weekly contribution to the initial $1,000 investment at the age of 18 and assuming the same 10% growth rate from the previous examples, the results are quite impressive:
| Initial Investment Amount | Age at End of Investment Period | Yearly Contribution | Growth Rate | Interest Earned During Period | Balance at the End of Investment Period (Initial Investment + Yearly Contribution + Interest Earned) |
| $1,000 | 19 | $260 | 10% | $126 | $1,386 |
| $1,386 | 20 | $260 | 10% | $164.60 | $1,810.60 |
| 1,810.60 | 21 | $260 | 10% | $207.06 | $2,277.66 |
| $2,277.66 | 22 | $260 | 10% | $253.77 | $2,791.43 |
| $2,791.43 | 23 | $260 | 10% | $305.14 | $3,356.57 |
| $3,356.57 | 24 | $260 | 10% | $361.66 | $3,978.23 |
| $3,978.23 | 25 | $260 | 10% | $423.82 | $4,662.05 |
| $4,662.05 | 26 | $260 | 10% | $492.21 | $5,414.26 |
| $5,414.26 | 27 | $260 | 10% | $567.43 | $6,241.69 |
| $6,241.69 | 28 | $260 | 10% | $650.17 | $7,151.86 |
| $7,151.86 | 29 | $260 | 10% | $741.19 | $8,153.05 |
| $8,153.05 | 30 | $260 | 10% | $841.30 | $9,254.35 |
By making a small weekly contribution of $5 per week ($260 per year), the expected return of $3,100 can be turned into $9,200 by the time the investor reaches 30.
More Time to Overcome Market Corrections
While the stock market has a historical average return of around 10%, there is no way to accurately forecast the return in any given year. As a result, while using a stable 10% growth figure is convenient and can help make ballpark estimates of where your account may sit at a future point in time, it will not be accurate in times of market correction.
Market corrections, sometimes referred to as sell-offs, are periods of negative growth in which more investors are selling their assets than making new contributions. While the definition of correction, bear market, panic, and depression differ among sources, there have been 28 instances in the past 50 years in which the market has dropped by more than 10%.
However, each correction has historically always been more than erased by a subsequent bull market, or period of growth. In fact, there are more than three times more positive growth days on record than there are negative days.
As a result, by starting your journey to wealth early, you give your account more time to make up for market corrections and experience the predominance of positive growth days.
More Time for the Next Big Thing to Take Off
Just like compound interest, building a successful business takes time.
When you invest in mutual funds, index funds, and ETFs, you purchase pieces of an aggregation of businesses, both mature and emerging. Sure, there will be some businesses that lose value over time. However, the downside to a business failure is capped at 100%, whereas the upside of a business that eventually takes off is unlimited.
Therefore, if you held tight to funds that had early shares of companies like Amazon, Netflix, or Tesla, any downside pressure that your fund faced from faltering businesses was more than erased by the exponential gains of these companies that went to the moon.
How to Start Building Wealth When You’re Young
By now, the advantages of starting young when building wealth are readily apparent. However, many young people are paralyzed with indecision as to how to get started.
Fortunately, with the proliferation of technology and smartphone platforms, it is easy to get started building wealth from the minute you turn 18. Use the following tips to help you get started along your journey to financial freedom.
Have a Clear Understanding of What Wealth Is
Many young people get enamored with nice clothes, cars, restaurants, and condos. They see celebrities and social media influencers flaunting these items and believe that possessing these things is the key to being wealthy.
However, this could not be further from the truth. In fact, even having a stable, high-paying job does not make a person wealthy.
Wealth is the freedom achieved when your money or assets make money for you. If you passively make more money each day than the cost to maintain your lifestyle, you can count yourself among the wealthy.
While having nice things and going to nice places is often an indicator of wealth, many people who appear to have it all are in terrible shape financially. When you turn 18, the freedom to make independent decisions with money can lead many people down the wrong path to wealth, so it is essential to have a clear understanding of what wealth truly is and a goal on how to get there.
Pay Yourself First
The golden rule on the path to financial freedom is to pay yourself first. Yes, even before you take care of essentials such as rent, utilities, food, and loans, the first thing to do with any money you get is to set aside between 10% and 20% for your future.
This can be challenging for young people who feel like they have ample time to get started and want to enjoy some of the nicer things in life while they can. However, as the previous charts demonstrate, making a few dollars a priority today can turn into thousands of dollars down the road.
Look Into Micro Investing Platforms
There are plenty of modern platforms that can help young people get started on their journey to wealth. Stash and Acorns are a couple of great options. It is easy to link your bank account and start investing from your smartphone in a matter of minutes.
These platforms specialize in helping beginners get their feet wet in investing. Known as micro-investing apps, they invest your money into ETFs and index funds in a couple of ways:
- By rounding up the “spare change” from your purchases and investing it. For example, if you made a grocery store purchase for $33.50, the platform would round the purchase to $34, keeping track of the additional $.50 in an investment pool and pulling it from your bank account once the pool reaches a certain level, usually $5
- You can make weekly or monthly contributions to your account, usually for as little as $5.
In both of these scenarios, it is hard to recognize the invested cash as missing from your bank account, but it can seriously add up over time. Once you get a feel for the power of regular investment, the platforms allow for one-time deposits to grow your account more aggressively, or you may choose to increase your scheduled contribution.
Leverage the Power of Digital Cash Envelopes
One great way to prioritize your finances is through the use of digital cash envelopes. Digital cash envelopes allow you to budget each month by pulling money from your bank account and allocating it for specific purposes.
Goodbudget is a well-known name in the digital cash envelope realm. Easy to access via computer or mobile app, Goodbudget can be configured to pull specific amounts from your bank account each month and place it in the desired envelope.
For example, as it is recommended to pay yourself first, the platform can be programmed to pull either a set amount or percentage of each bank deposit and place it in the “investing” envelope. You will also likely want to create envelopes for rent, food, car expenses, etc.
Open Multiple Accounts for Different Purposes
While you will always want to have that main brokerage account that you aggressively work to build for the long haul, it can also be a good idea to open several accounts for different purposes.
For example, you may want to set up an intermediate-length account that allows you to build toward a down payment on a house. It’s also a good idea to open a health savings account to be in a good position should any unexpected medical bills arise.
Maximize Employer Match Programs
Given the power of time in building wealth, it is essential to maximize employer match programs as soon as you can. Many young people keep their 401(k) contributions small in the early going to help afford more of life’s day-to-day necessities, leaving free money on the table through forfeited employer match programs.
It is better to live with roommates, eat store brands, and drive a used car young to capitalize on employer match dollars that will allow you to live, eat, and drive wherever you want later in life.
Mistakes Young Investors Make on the Road to Wealth
Despite the power of starting your journey to wealth early in life, many young people make a litany of mistakes and hold several false assumptions that get them off track before they get properly started.
Believing You Don’t Have Enough to Invest
This is single-handedly the most significant mistake young people make on the road to wealth. Unfortunately, there is a common assumption that you cannot start building a financial future without at least a five-figure nest egg.
In 2021, nothing could be further from the truth. The aforementioned micro-investing platforms can purchase chunks of quality ETFs for as little as $5, while other platforms, such as Robinhood or Fidelity, allow users to buy fractional shares of everything from Amazon to Kraft Foods for as little as $1.
Time is more important than the dollar amount on the road to wealth, so don’t let the popular conception that the rich are the only people who can invest dissuade you from opening an account.
Withdrawing Invested Funds Prematurely
Too many young people lose track of their goals and become tempted by an account balance that grows faster than they ever could have imagined. While $50,000 may seem like a fortune to a 25-year-old, it is a far cry from wealth, and its main power to a young person is its ability to grow.
Nonetheless, a young person may look at that nest egg and decide to take half for a new car and leave the rest to grow. This causes a couple of problems:
- You will get taxed on the gains—something that many young people do not account for and are ill-prepared to pay.
- Your interest-earning potential will be cut in half, the result of which means forfeiting potential exponential gains in the future.
Checking Account Balances Too Frequently
With smartphone technology, it is easy to check account balances with a single swipe. However, market volatility can cause investors to make irrational decisions based on emotions.
For example, if you checked your account every day during the COVID-19 driven plunge in March 2020, it is very likely you sold your position at a substantial loss.
Therefore, it is best practice to check your account balances sporadically (once a month or once a quarter is usually best) to take the emotion out of investing. Use the aforementioned digital cash envelopes or robot investors to make your contributions regular and automatic so that you do not have to constantly check your account.
Trying to Time the Market
One of the golden rules in investing is time in the market, not timing the market. Substantial wealth has been lost by investors trying to predict the next market crash. There is no way to know exactly when it will occur, and some of the best gains occur in the days right before a crash.
Trust the long-term process and know that even if your account does have some bad days here and there, history is definitely on your side.
Are You Too Old to Start Building Wealth?
Although it is best to get started on your investment journey a soon as possible, do not be scared off if you are past your 20s. The best time to get started on the road to wealth was yesterday, so no matter where you are in life, the chance at a brighter financial future is within your grasp. You may have to save more aggressively to make up for lost time, but there are so many reasons to be excited, including:
- Less physically demanding jobs, allowing people to work longer, if they choose, to increase savings opportunities
- Commission-free trading platforms that allow all of your invested capital to go to work for you
- Improvements in technology and healthcare that may allow you to live a longer, more fulfilling life to enjoy the fruits of your nest egg
Conclusion
While there are many reasons why starting young is best when building wealth, the main consideration is to capitalize on time, the most valuable and finite of resources. Tied directly into this is the power of compound interest, which allows investors to earn interest on top of interest. By making regular contributions to a moderately aggressive fund from a young age, anyone can have a chance at wealth later in life.
Einstein Compound Interest – Intentional Wealth Advisors (intentionaladvice.com)