Director, Investor Education
Although seemingly not a priority early in life, everyone (especially young people) should make it a priority to save and invest early.
How can people be expected to save and invest for the future if they haven’t been given a rudimentary financial education? Few students graduate from school knowing how to manage their personal finances, and that lack of knowledge can put them at a serious disadvantage. It can often be helpful to neatly summarize a concept, so here’s a financial education in three words: Save money. Early.
Many have little comprehension of the benefits provided by certain types of accounts, and together with a propensity to consume, this can lead them to delay, diminish, or disregard saving. Don’t. There are a variety of ways individuals can benefit by being especially cognizant and diligent about saving and investing early in life:
- A safety net is built. Murphy’s Law holds that “anything that can go wrong will go wrong.” It may not be healthy to have such a pessimistic outlook on life, but when it comes to building a healthy future, the best course of action is to proceed with caution. Recent history is a testament to what can happen, and if there is one lesson to take away from the economic crisis, it is that shocks to the financial system can have a devastating impact on the personal fortunes of anyone and everyone. A safety net can serve as a buffer against unexpected lifestyle changes and cataclysmic events.
- Wealth is created through investing. Over time, the stock market has proved to be one of the greatest ways for individuals to build wealth, but it’s necessary to have savings in order to build wealth through investing. Nearly everyone would like to be financially secure—and investing is one of the best ways to accomplish this goal—but it is saving continually over time that provides the required capital.
- A time advantage is secured. Albert Einstein reportedly referred to compound interest and its ability to help investments grow by reinvesting the proceeds as the most powerful force in the world. Though we can’t be sure he actually said that, he certainly would have been right to: The power of compounding and the time to ride out market swings are what allow younger investors to take either more risk (in hopes of a greater return) or less risk (and still achieve the same goals) than older investors.
- Experience is developed. One doesn’t become a proficient saver or investor overnight. It takes time to build the financial discipline necessary to save when you can, and the same goes for building the analytical skills needed to estimate the value of a security or to distinguish a mispriced asset from one with limited growth prospects. Younger investors have an advantage by starting early and building their skills over the long term.
Though an exhaustive list of the benefits of saving would be almost infinite, after a certain point it’s almost more important to stop thinking and begin putting money away. For help finding easy ways to save automatically, check out our post detailing some of the easiest ways to save automatically. For more educational material, follow us on twitter @cfainvestored.
William Ortel contributed research and reporting.
The information contained in this article and from any related communication is for informational and educational purposes only. The information in this article should not be interpreted or used as investment advice. CFA Institute does not recommend or endorse any investment security, product, or strategy or any service, product, or material submitted by or linked to this article by third parties.
