3 reasons why investing earlier builds more wealth

August 17, 2020

The cliche No time like the present is overused. You hear it in the context of buying a house too. What is missing and not looked at is the why starting earlier in the context of investing makes a difference and how it allows you to grow more wealth.

Reason 1 – Compounding needs time

The most important principle about investing, is that the earlier you start your investment journey the easier it gets to build your wealth. The main reason for this is that it allows your money to take advantage of compounding return. We have explained with examples in our article how compounding is one of the 3 reasons we beat index funds and short term trading on the share market.

Reason 2 – Learning earlier from mistakes

The other reason it is important to start early, is that you learn from your mistakes earlier. What this does is give you experience which cannot be learnt from a book.

A mistake you might make as 20-year-old with $500 is not going to be as costly as a mistake you make when you invest in your 40’s and lose your life savings.

Reason 3 – Growth Mindset and psychology

Starting earlier, even with a smaller amount means you learn by doing and as a result you experience the following scenarios:

  • Seeing your portfolio in red and what that feels like
  • Patience to allow the companies to grow and therefore your investment
  • Developing a detachment to short term price movements
  • Learning objective decision making by recognising when emotions like fear and greed influence us

These situations over time build resilience and make one have a much higher stress and risk tolerance.

Current market conditions an opportunity

With the virus crisis and the economy not fully recovered yet, there is no better than to start than now. Certain sectors and companies are trading at a discount. We use the Tabarruk Framework and Screening Process to identify these and invest in them.

Start with the basics

The most important step you take in your investment journey, is to pay yourself first. You need money to invest and if you don’t do that, there is absolutely no way you can build your net worth.

Regardless of the size of your paycheque right now, take the challenge to pay yourself next time you get your salary.

Decide what percentage of your income goes towards your future. If you want a conservative figure pay yourself 10%.

Put that money aside into an account where you cannot touch your money.

For those who struggle to make ends meet, don’t lose hope, we were there ourselves at a point in time.

I strongly recommend you read our upcoming series ‘Money Habits 101’.

Even for those who live month to month, work out objectively if your expenses are more than your income.

If they are then quickly make a plan and accept that flipping the scales to have your income be greater than your expenses may need some sacrifices and change in spending behaviour.

The next step is to have an emergency fund. There is no point starting your investment journey without an emergency fund. If an emergency strikes and you must touch your principle.

Ensure you keep paying yourself, till you have 4-6months of income set aside and then start your investment journey. If you think this will take too long to save up, then increase how much you pay yourself.

To earn more, you have to learn more

The best ‘non-financial’ investment you can make is in yourself.

Educate yourself, sign up to courses learn about investment, look at what successful investors are doing.

Be different, as most of the world is working on auto pilot and you need to chart your own unique path out of the rat race. This will allow you to make better, rational and educated decisions in your life.

To earn more you have to learn more.

Once you have got this far, you start looking at stocks and ETF’s. Explore all the options that are out there for you.

As someone who only invests in a Halal and ethical companies, my life is so much easier as my screening for the companies that fit our criteria makes the investing world that much smaller and the ability to pick good companies becomes easier.

Start early but stay for the long term

When investing, the best thing you can do for yourself is have a long-term mentality.

If you don’t have a long-term mentality, then this article is probably not for you.

The reason a lot of people make extremely bad decisions is because they have a get rich quick mentality.

Tabarruk’s and our personal investment success is due to the long-term investment approach we take.

Our focus is to invest in businesses that have good long-term prospects and a good history of positive return and yield.

The beauty in investing in these kinds of business when you start early, is that you have the luxury to wait.

Regardless of the price of the stock going up or down in a business you have invested in, it won’t you because you’ve understoof the business and their long-term prospects.

If anything, when the price is down, you just buy more. We cover this in The secret to buying at the bottom article.

When you invest with a long term mindset you understand that regardless of the economy booming or entering a recession, solid businesses always find a way to thrive and the market always recovers and stops for no one.

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