Updated: Aug 16, 2020
I often hear people say they don’t want to start investing for their future or their retirement right now because they only have a few bucks they could invest each month, so in their eyes, it’s not worth it. I think this feeling stems from a lack of confidence. “Only rich people have money to invest.” It is true; rich people are the ones doing most of the investing; most people have the causal relationship backward. Rich people don’t invest because they are rich; they are rich because they invest.
In this article, I’m going to explain why investing even a small amount of money can help you build wealth in the long term. There are two primary benefits of investing as little as $25 per month;
A small amount of money can add up over time.
There is a psychological benefit of getting off the sidelines and becoming an investor.
Don't waste the power of compounded returns
I am sure many of you have heard the phrase “time in the market is more important than timing the market.” Let’s discuss what that actually means and why it is so true.
The longer you have your money invested, the more you will benefit from compounded interest. Put in the simplest terms possible, compound interest is the interest earned on your interest.
The only thing you need to know about compound interest is that the longer you keep your money invested, the more you benefit from it.
If you put off investing until a time that you feel you can invest enough to make it worth your while, you will be giving away the benefits of compounded returns.
Let’s say you are 25 years old, and you start investing $25 per month and earn an annual return on investment of 6%. Even if you never increase your monthly investment contribution, by the time you are 65, you will have $50,036.
$12,000 of which comes from your $25 monthly contributions and;
$38,036 of which comes from compounded interest.
If you waited until you were 35 to start investing, in order to end up with approximately $50,000 by the time you were 65, you would need to contribute $50 per month.
$18,000 of which comes from your $25 monthly contributions and;
$32,000 of which comes from compounded interest.
You still have $50,000, but since you waited 10 years to start contributing, you had to contribute 50% more of your own money to do so.
The point is that time is the most important investing variable because it’s the only variable you can control. Even if you only have $25 per month to invest, use time to your advantage.
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Getting off the Sidelines
Even more important than leveraging compound interest is the psychological benefit of going from non-investor to investor. Many people find the idea of investing their hard-earned money to be terrifying and intimidating.
There is never a “right time” to start investing your money and taking control of your financial future. It’s best to just “rip the band-aid off” as early on in life as possible.
In fact, it’s much less scary to start investing with $25 per month today than waiting 10 years from now and start investing $1,000 per month. If the stock market tanks, when you have $450 invested, chances are that won’t impact your financial stability.
Experiencing a stock market crash with less than $1,000 invested might be the best thing that could ever happen to you. Since your paper loss is only a few hundred dollars, you might be less tempted to make a panic decision to sell and lock in a loss.
If you hold the course, chances are you will make all that money back and then some overtime. Learning these types of lessons when the amounts are small can benefit you greatly when the amount you have invested is significant.
Think of investing $25 per month as your “investing training wheels.” By the time you have a more substantial amount of money, you can invest every month. You will be an experienced investor and better prepared to handle the ups and downs of the stock market.
Will investing $25 per month make you a millionaire on its own? Of course not.
But investing $25 per month right now will put you in a much better financial position 30 years from now, even if you never increased your monthly contributions.
However, the real benefit of investing $25 per month right now is that you get a taste for investing. Once you start to see your money grow, you’ll be amazed at how motivated you will be to find a way to invest more money. Before you know it, you will be investing hundreds of dollars per month and putting yourself in an infinitely better financial position than if you just said: “I won’t start investing until I have more money.”
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.