A Cardinal Investment Mistake of Young Professionals – Starting Later Rather Than Sooner

When students complete their post-secondary education and begin launching their professional careers, there is a great feeling that the young professional has all these options which were not available in prior years, because for the first time in their lives they become financially independent of their parents. This is a wonderful feeling, even exhilarating, because opportunities become available for travel, eating in restaurants, going out with friends and having the means to do it.

However, what is more difficult to foresee is how financial prudence in those early days of a career is critical in laying the ground work for securing financial wealth in the future. What most do not realize is that through early investing, and individual can save themselves years of setting aside money in later years, when things like a family, a mortgage and other fixed expenses diminish disposable income and make investing even more difficult. To be a successful investor it is critical to invest early, and as much as possible.

Let’s take a look at a real life example that will demonstrate the power of early investment relative to waiting until after the first few years after one has started their career. The golden rule is: the sooner you start, the better. One of the most powerful concepts in investment is compounding returns. This compounding principle can help an early investor build up a sizable nest egg by retirement age with minimal upfront investment, as compared to someone who waits 10 years to start investing, and then spends the next forty years playing catch-up.

Someone who starts investing at age 25 and invests $5,000 per year for several years, can afford to stop contributing new money after some time and let the annual returns from their investment build up their portfolio value. Someone who begins investing later in life will need to continue contributing to their investment portfolio if they want to build up a reasonable sized portfolio when they retire.

In the table below, we show Investor 1 who begins investing $5,000 per year when they turn 25 years old, making their last $5,000 annual contribution when they are 35 years old. Thus, the total amount invested (contributed) over the 11 year period is $55,000 (they stop contributing after the age of 35). The annual return on the money invest remains constant, at 6.00%, and stays this way every year from the age of 25 to the age of 65. This is a reasonable rate of return if invested in equity markets, but is obviously a higher rate of return than what is currently available through a Guaranteed Investment Certificate (GIC) available at most financial institutions.

Investor 2 doesn’t begin investing until they turn 35 years old, and invests $5,000 per year every year, up to and including their 65th birthday. The total amount of contributions by Investor 2 is $155,000 over the 31 year period from age 35 to age 65. Investor 2 is also able to generate a 6.00% annual return every year.

As can be seen from the condensed table, investing early can help a young professional better manage their finances from the time they begin their working careers before they get married, have children and buy a house and get tied down with a mortgage. Investing regularly and consistently in the first 11 years of one’s working career can provide the financial foundation that will allow for reduced investing during the years that there is less disposable income because of other financial obligations that come with a growing family.
Investor 2 has to contribute annually for 31 years, earning the same annual 6.00% return as Investor 1 earns, but has to contribute $155,000 over those 31 years just to have a similar nest egg to Investor 1, who only contributed a total of $55,000 (or only 1/3 of Investor 2 contributions) over the lifetime of the portfolio.

So, in investment, it is important get started as early as possible. Don’t wait until life’s other financial obligations limit you in your ability to set aside money for your retirement.

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union Limited
416-763-5575 x204
[email protected]
www.ukrainiancu.com

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