The Power of Investing Early

Originally published on Linkedin on 01 June 2022

The wisdom of investing early is not only valuable to those in their teens, 20s and 30s, but to people of all ages. You can share this message with any young people in your life or even invest on their behalf. Doing so certainly has the power to change lives.

If you are a parent living in the UK, you can do so tax-efficiently via a Junior SIPP (pension) or Junior ISA.

The Magic of Compounding

Albert Einstein reputedly said that “compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.”

We can illustrate the power of compounding by starting with a penny; if we double it every day, we end up with just under £5.4 million by day 30.

1p, 2p, 4p, 8p, 16p, 32p, 64p, £1.28, £2.56, etc.

Why Investing Early Matters

A more realistic example shows the advantage of compounding investment returns from a younger age:

Assuming a 12% annual growth rate, if we contribute £2,000 per year from age 40 to 77, our investment will grow to £1,363,780 by age 77.

With the same 12% annual growth rate, if we instead start contributing £2,000 per year from age 34 and then stop contributing at age 39, our investment will grow to £1,348,440 by age 77 .

As you can see, there is little difference in the outcome but a monumental difference in the level of investment (6 years instead of 37 years of contributing!). Investing just slightly earlier makes all the difference.

While quite generous, the 12% growth rate in the example is certainly not unheard of. Just imagine what can be achieved with larger, more continuous contributions from younger ages - I will leave you to do the maths.

Tip for UK Investors

The best UK-based investment structure for people of all ages to capture the power of early investing and compound returns is a pension. The investor cannot access their pension until age 55 (increasing to 57 from 2028), which somewhat forces them to benefit from decades of compounding - not to mention the numerous tax advantages that pensions provide.

I hope you found this article insightful and please feel free to comment below. 

Disclaimer: This article does not constitute financial advice as it is not tailored to one's circumstances.