Why Starting to Invest Early Saves You Money

TL;DR

Starting to invest earlier can sharply reduce the monthly and total contributions required to reach a long-term financial goal because returns have more time to compound. Keeping money in cash also exposes it to inflation, while delaying investment sacrifices potential growth and removes the most valuable later years of compounding.

Transcript

Hello and welcome to The Plain Bagel. We're back again with another party pooper video. Uh, sort of. It's more of a call to action than anything else. Um, you know, on this channel, I always like to dive into advanced topics that are interesting and things like that, but every now and then, I like to return to very simple concepts, uh, to the core ... Read More

Key Insights

• Saving is not the same as investing: the cited Ontario Securities Commission survey found that 80% of participating millennials had savings and 73% made regular contributions, but only one in two invested their money.
• Common barriers to investing include competing financial priorities, limited knowledge, and fear of losses. In the survey, 68% cited priorities such as debt, housing, and retirement, 59% said they lacked sufficient knowledge, and 57% worried about losing money.
• Inflation reduces the purchasing power of cash over time because rising prices allow each dollar to buy fewer goods. The transcript cites average ten-year inflation rates of 1.8% in the United States and 1.6% in Canada.
• Savings accounts and GICs can offer lower risk and lower returns than investments, but their returns may not keep pace with relevant price increases. The speaker notes that Canadian savings accounts offering 2% were rare when inflation was approaching that level.
• The time value of money means money available today is worth more than the same amount received later because the earlier money can earn a return. At 2%, $1,000 invested today becomes $1,020 after one year.
• Compounding works by generating returns on both the original investment and previous returns. At a 10% annual return, $100 earns $10 in year one, $11 in year two, and $12.10 in year three.
• Starting at age 25 dramatically lowers the contributions needed in the retirement example. To reach $800,000 by age 65 at a 6% annual return, the required monthly investment is $419, with total personal contributions of $210,293.
• Delaying until age 45 more than quadruples the example's monthly contribution to $1,764 and raises total personal contributions to $423,432. Waiting until age 55 increases the required monthly amount to $4,924 and total contributions to $590,866.

Questions & Answers

Q: Why does waiting to invest cost so much money?

Waiting to invest creates two costs identified in the transcript: inflation and lost opportunity. Inflation reduces the purchasing power of cash over time, while lost opportunity means the money misses potential returns. Because investment gains can generate additional gains through compounding, delaying also removes later years from the growth period, when the dollar amount of annual returns can be greatest.

Q: How does inflation affect money kept in cash?

Inflation causes prices to rise over time, so a fixed amount of cash gradually buys fewer goods. The transcript cites average ten-year inflation rates of 1.8% in the United States and 1.6% in Canada. Those annual reductions may appear small, but they accumulate across decades and can leave retirement savings with substantially less purchasing power than originally expected.

Q: What is the opportunity cost of delaying an investment?

The opportunity cost is the return that money could have earned if it had been available and invested earlier. In the transcript's simple example, one person receives $1,000 today and earns 2%, ending the year with $1,020. Someone receiving the same $1,000 one year later has only $1,000 because that person lacked the earlier opportunity to earn $20.

Q: How does compound growth work in investing?

Compound growth occurs when an investment earns returns on both its original value and the returns already accumulated. The transcript illustrates this with $100 earning 10% annually. It earns $10 in the first year, $11 in the second, and $12.10 in the third. The annual dollar gain increases because each return is calculated from a progressively larger balance.

Q: How much must someone invest monthly from age 25?

Under the transcript's simplified retirement example, someone starting at age 25 needs to invest $419 per month to reach $800,000 by age 65, assuming an average annual return of 6%. Across the 40-year period, that person contributes $210,293 personally. The remaining portion of the target comes from the assumed investment growth accumulated over time.

Q: How much more is required when starting at age 45?

Starting at age 45 in the simplified example requires monthly contributions of $1,764 to reach $800,000 by age 65 at an assumed 6% annual return. That is more than four times the $419 monthly amount required from age 25. Total personal contributions also rise from $210,293 to $423,432 because the investment has only 20 years to grow.

Q: What happens if someone waits until age 55 to invest?

Starting at age 55 leaves only 10 years to reach the example's $800,000 retirement target. At the assumed 6% annual return, the required monthly contribution rises to $4,924, and total personal contributions reach $590,866. A larger share of the final balance must therefore come directly from paychecks because there is much less time for returns to compound.

Q: Why do many millennials save but avoid investing?

The cited Ontario Securities Commission survey identified several reasons. Among participants, 68% reported other financial priorities, including paying down debt, buying a house, and saving for retirement. Another 59% said they did not know enough about investing to begin, while 57% worried about losing money. The report also described millennials as more likely to postpone deciding what to do with accumulated savings.

Summary & Key Takeaways

• Many millennials save regularly but do not invest their accumulated money. The cited Ontario Securities Commission survey found that 80% had savings and 73% saved regularly, yet only one in two invested. Reported barriers included competing financial priorities, insufficient investing knowledge, fear of losses, and a tendency to postpone decisions.

• Delaying investment creates two costs: inflation and lost opportunity. Inflation gradually reduces how much cash can buy, while opportunity cost reflects the returns that money could have earned. Savings accounts and GICs may provide lower risk, but their returns may still be insufficient to preserve purchasing power against relevant price increases.

• Compounding makes investment returns grow on prior returns, so time can substantially reduce the personal contributions needed for retirement. In the example, reaching $800,000 at age 65 with a 6% annual return requires $419 monthly from age 25, $1,764 from age 45, or $4,924 from age 55.

• Key Insights typically include independent, citable facts supported by the transcript.