It is common for younger adults to have a lower income and higher levels of debt than older adults. While each person is different, your earning power will generally increase over the years. In addition, you may have student loans, furniture loans, car loans and more in your younger years. This is a time in your life when you are trying to establish yourself and set up your life, and it is common to accumulate debt by doing so. You may spend future years trying to pay these debts off.
With all of these factors at play, you may be one of the many young adults who find it difficult to save money and who believe that there will be plenty of time later in life to do so. However, time is on your side when you are saving and investing due to the power of compounding. Because of this, now is the right time to get into the habit of saving and investing regularly.
What Is the Power of Compounding?
With an interest-bearing savings account, your account balance will generate income for you on a regular interval. The actual interval and the amount of interest generated will be based on the terms of your account. However, this interest will be added to your existing account balance. This means that the next time your interest is calculated, it will be calculated based on the higher account balance. Each additional time that the interest is applied, you will benefit from the effects of compound interest. You essentially are making interest on your interest, and your account balance will grow at an increasingly faster pace even if you do not make additional deposits. To truly benefit from compound interest, you will also want to make additional deposits to the account on a regular basis.
Putting Compounding Interest to Work for You
The power of compound interest will be even more effective for you as the years go by. Consider, for example, how much higher your interest will be on your account 20 years from now versus next month. It is easy to get started putting compound interest to work for you. You simply have to find a savings account with a great interest rate and make your initial deposit. To see better growth, set up an automated draft that transfers money from your checking account to your savings account on a regular basis.
You may not be able to afford to save hundreds of dollars or more per month. The initial goal is to get into the habit of saving regular, so even if you can only afford to save $20 every two weeks, this is better than nothing. Over time, you can slowly increase the amount. You may find that you are eventually able to save hundreds of dollars or more per month after you get into the habit of saving.
How Compounding Impacts Stocks
Compounding can also be applied to your stocks as well. Many stocks pay dividends, and many stock accounts enable you to automatically reinvest your dividends back into your stock account. Essentially, the dividends that you earn will be used to purchase additional shares of the same stock. Those shares will then produce even more dividends, which will then be used to purchase even more stocks. You may think that you need a lot of money to start investing in stocks, but this is not true.
There are several financial institutions and brokerage houses that have share-building program. These enable you to set up an automatic draft from your checking or savings account and to make regular stock purchases. There is no minimum amount for the purchases with many of these accounts, so you may be able to purchase $50 of stocks per month or less to get started.
If you have not started a retirement savings account yet or if you do not have a nest egg established, now is a great time to do so. You can easily open these accounts and fund them to get the process started, and you may be surprised how quickly your account balances will grow over time.