Early investing is one of the most effective ways to build wealth. With time on your side, you have more potential to turn a comparatively small investment into a sizable nest egg. You just need to know what to invest in and how to get started.
In this article, we’re doing a deep dive on early investing, including:
- Why you should start investing early,
- The advantages of compounding interest,
- 7 different ways to invest early,
- And how Gatsby Investment can help you reach your investment goals.
Why you should start investing early
This probably isn’t the first time you’ve heard that you should invest early. But why is it important to invest early?
There are several reasons why you should start investing as young as possible, including:
- Building the habit. When you start investing young, you’re training yourself in good financial management. This makes investing more likely to become second nature, which means you’re more likely to keep it up consistently throughout your life.
- Getting used to not having all of your income accessible for expenses. Investing later in life is more difficult because you’re accustomed to spending all of your income. So, suddenly putting aside 10-20% for investments would require a major shift in your finances. But when you start setting aside money for investments early, you never have to feel that sudden pinch that threatens to derail your plans.
- Purchasing assets while costs are comparatively low. The value of assets (like real estate) increases over time. By investing early, you’re generally able to get the same asset at a lower price than you would pay if you waited a few years.
- You have time to rebound from any missteps. Investing is a learn-as-you-go game. You might make a mistake along the way, and doing so while you’re young means you can correct course early.
- Taking advantage of compounding interest. Money makes more money, and you can take advantage of this concept to build wealth of your own.
Advantages of compounding interest
Compounding interest is when you earn interest, not just on your investment, but also on the interest your investment has already earned.
For example, if you invest $1,000 with an interest rate of 6%, you would earn $60 in interest. But then the next period, you get to collect interest on the full value of $1,060, giving you $63.60 in interest for that period, and bringing your balance to $1,123.60. This small amount of additional interest might not seem all that impressive, but over time, this exponential growth makes a huge difference.
Consider this chart from J.P. Morgan Asset Management, published on Business Insider:
Susan invests $5,000 per year from ages 25 to 35, then never invests another dollar. But her $50,000 investment turns into over $600,000 (assuming a 7% rate of return). Bill, who waits until he’s 35 to start investing, never catches up to Susan even though he invests $150,000 total (three times as much as Susan) between the ages of 35 and 65.
Then there’s Chris, who invests early and consistently. With his $5,000 annual investment from ages 25 to 65, he invests a total of $200,000, but his compound interest turns that amount into $1.14 million.
This is the magic of compounding interest, and it’s the single best reason to start investing early.
7 different ways to invest early
So, you know you need to starting investing early, but what should you invest in?
Here are seven different ways to start investing early.
1. Employer-sponsored retirement accounts
Employer-sponsored retirement accounts are usually the first investment opportunity actively presented to young adults. When you land your first “real job,” the benefits package often includes an employer-sponsored retirement account like a 401(k) or 403(b).
When you’re in your 20s and 30s, retirement is decades away. Most young workers are focused on building their careers, and retirement isn’t even on their radar. Plus, junior employees are paid less than senior employees and generally have a harder time covering basic expenses like housing, food, and utilities. So, what is the advantage of investing early for retirement?
First, you have the enormous advantage of compounding interest as we discussed previously. Secondly, the U.S. government offers tax incentives for joining your employer’s retirement plan. Specifically, your retirement contributions are “pre-tax.” This means any amount you pay into your retirement account is not taxed as income. This is important because it means you can afford to contribute more money. And, as we saw earlier, the more money you invest early, the more you get to take advantage of compounding interest. Your money can grow tax-free until you start withdrawing funds to live on during retirement. At that point, your withdrawals will be taxed as income.
And finally, your employer may offer incentives of their own. As part of your benefits package, some employers offer “contribution matching.” This means that your employer will contribute to your retirement fund as you contribute (up to a certain dollar amount or percentage). This is free money you can use to grow your retirement investments!
2. Private retirement accounts
There are several reasons you might want a private retirement account:
- Your employer might not offer a retirement plan,
- You might want to save more than the government limit on your employer-sponsored retirement account,
- Or you may be self-employed.
There are different types of private retirement accounts to meet your unique needs and goals. A solo 401(k) is typically reserved for those who are self-employed, while IRAs and Roth IRAs are available to everyone. The key difference between IRAs and Roth IRAs is the way you receive your tax benefit. Traditional IRAs are pre-tax (like 401(k)s), but Roth IRA contributions are after-tax, which means you pay taxes now on your contributions, but then you get to withdraw your Roth IRA funds tax-free during retirement.
As you become a more advanced investor, you may also want to consider self-directed retirement accounts. Unlike standard retirement accounts, which only allow you to invest in financial securities (like stocks and bonds), self-directed retirement accounts allow you to invest in diverse projects like real estate and businesses.
3. Stocks and Bonds
Retirement accounts are great, but what if you want to use the proceeds from your investments before retirement age? With retirement accounts, there are heavy limitations on when (and why) you can withdraw funds without penalties. That means if you want the flexibility of cashing out your investment before retirement age, you need a different option.
Stocks and bonds are classic building blocks of a well-balanced investment portfolio. They can be bought and sold easily online, and with thousands of stocks and bonds to choose from, they are exceedingly flexible.
Investors usually choose a mix of low-risk bonds (like U.S. government bonds) and growth stocks (that are more volatile but provide higher returns over the long run). The key is to keep your portfolio diversified so that a major disruption in one market segment doesn’t bring down the value of all of your assets. Generally speaking, the earlier you invest, the more of your mix can be in aggressive growth stocks. Then, as you get closer to the point where you want to use the money in your investment accounts, the more you should favor safer investments like bonds.
You might also want to consider investing for dividends rather than growth. With dividend investing, the value of each share won’t grow as much as with growth stocks, but you get a cash payout in the form of a dividend each period. This payout can be used as passive income, or you can reinvest the dividends to buy more shares, which will increase your returns over time.
4. Index Funds and Mutual Funds
Index funds and mutual funds are bundles of shares in multiple stocks and/or bonds. They are exceedingly popular for investors who want a diversified portfolio but don’t have the time, experience, knowledge, or patience to choose individual stocks and bonds.
Index funds and mutual funds are similar in that they are both automatically diversified because they contain shares from many different organizations. But there is one big difference: index funds passively follow a single market index (like the S&P 500, for example) while mutual funds are hand-selected by a fund manager. For this reason, index funds usually have lower fees than mutual funds. Interestingly, index funds generally outperform mutual funds! Unless you have a good reason for choosing a specific mutual fund, index funds are often your better bet.
5. Real estate
Real estate is a fantastic early investment because there are so many varied options for investing in real estate. Whatever your experience level or investment budget, there is a real estate investing option for you.
Here are just a few of the ways you can invest in real estate:
- Traditional buy-and-hold: buying a property and renting it out for the long-term.
- Traditional fix-and-flip: buying a fixer-upper, renovating the property, then selling immediately.
- Wholesaling: getting properties under contract, then selling the purchase contract to an interested buyer.
- Real estate notes: acting as the lender for homebuyers.
- Hard money loans: lending cash to flippers to complete their purchase and renovations.
- REITs: investing in a financial security that funds real estate-related companies.
- Crowdfunding: pooling money with other investors to fund a specific project or set of projects.
- Real estate syndication: A specific form of crowdfunding in which the investors enter a stable legal partnership to jointly own a real estate project or development.
Each method of real estate investing comes with its own set of pros and cons. But wealthy investors return to real estate time and again because of general benefits like:
- Asset appreciation over time
- Passive rental income
- High demand for housing, which drives increases in both property values and rental rates
- The hedge against inflation
- Potential tax advantages
- The satisfaction of owning a substantial tangible asset
To keep your investment portfolio diverse, it’s generally a good idea to invest in both stocks and real estate. But if you’re deciding between investing in real estate vs the stock market, pay attention to your current needs. If you need an investment you can easily liquidate, stock market securities may be a better fit for you. If you already have a stock portfolio and want to diversify, real estate is an excellent alternative.
Investing early with Gatsby Investment
Gatsby Investment is an experienced real estate syndication company that makes it fun and easy to invest in real estate. Our flexible investment options allow you to choose the investment type that works best with your unique needs and goals.
- Single-family flips that offer exceptionally low minimum investments and short timeframes.
- Multi-family developments that provide more housing units to help combat the housing crisis.
- Luxury homes, where you can be part of an exciting high-value development project that would be unattainable to most individual investors.
- Rental properties that offer passive rental income potential to investors.
If you’re new to real estate investing, it can be risky to buy property on your own. Without experience, you may not have the specialized knowledge or skills required to maximize the return on your investment. Gatsby’s professional team of real estate analysts, contractors, project managers, architects, and interior designers expertly handle all the details for you. And you get to watch the progress of your development directly through Gatsby’s secure online portal.
Whether you want to invest as an individual, as a company, or even invest through your retirement funds, Gatsby is here to help you meet your investment goals.
Simply sign up online, complete the application to be verified as an accredited investor, and choose the project(s) you want to invest in. We'll take it from there!
Start your real estate investment portfolio by signing up with Gatsby Investment today and enjoy all the benefits of investing early.