Young Professionals & Good Financial Decision-Making

by Jonathan G. Cameron, CFP®

Isn’t it funny that we are expected to make the biggest decisions of our lives when we are young? 

We get married, we pursue a career path, maybe have children. We have to make quite a few decisions that will affect us the rest of our lives and determine our future trajectory. The decisions we make now can lead to heartache and loss, or security and success down the road. Some of us are fortunate to have parents to steer us in a good direction, while others lean on friends, extended family, or (gasp!) blogs. When to start investing for the long-term is also part of this equation.

When to Start Investing? The Answer Could Mean Millions.

Sometimes pure inertia delays our decision-making process.  We know we need to save for the future.  We know we need to save for retirement.  But that is so far away!   And if we start off on a bad foot we may choose a bad investment, establish a short-sighted plan, and potentially lose out on hundreds of thousands, if not millions, of dollars of compounded market returns.

Big “little” decisions

The most well-informed big decisions in life are nearly always preceded by hundreds of small decisions. The same is true of a good personal financial plan and when to start investing.

You may be some years away from earning the maximum income you were trained for, but you have already made a hundred small, strategic decisions that got you where you are now. Your financial trajectory going forward will depend on the choices you make now and the immediate future.

Will your decision on when to start investing cost you?

We are very busy people. For young professionals in the first half of a potentially lucrative career, working long hours goes with the territory. Working harder (and smarter) is how we get to the next level, both personally and professionally. However, it also means we defer some big decisions into the future. While we may potentially have more available to start investing our 401ks or IRAs 5 years from now, waiting can be very costly. Here is an example of the time value of money:

The Difference Between Investing at 30 Instead of 35

Say you start investing at age 30 and you want to have $2.5 million in your portfolio when you retire at 65. For illustrative purposes, we’ll ignore the eroding effects of inflation on your buying power. We’ll assume that your future returns are the same as what the S&P 500 index did over the last 35 years (2020). These assumptions include the Great Recession, the Tech Bubble, and the rest. This is about 15% compounded annually.  Of course in real life you're not going to get a steady 15% return each year and on each item of dividend and interest, but we'll use that number.  

At age 30, you’ll have to contribute $170.33 per month to reach your $2.5 million goal.

If you wait only 5 years and start investing at age 35, you’ll have to contribute $361.10 per month. Waiting 5 years will cost you more than $190/month additional dollars - a more than doubling!

Look at it from the future back to now. If you invested that $170.33/month for 30 years - not 35 -at 15%, your account would be worth $1,179,242.  So the cost of waiting those 5 years is $1,320,758!  Over a million bucks!

When to Start Investing

The answer to this question is easy:  NOW!  Just  do what you can.  Don’t wait to do something else first. If it is only $25/month, it is a start.  Increase it as you can. 

I don’t recommend a “rule of thumb” percentage to determine how much should should be saving.  Your budget, time-horizon, risk-tolerance, and personal goals will dictate a contribution level that is right for you.  Here are some Investment FAQs.  

Here I quote Emerson – “The reward of a thing well done, is to have done it”. You will never ever look back in life and see that you saved too much. 

Get in touch! 

Check out Glenn's piece on The Time Value of Money. Questions? Feel free to get in touch with us at [email protected] Also follow us LinkedIn, Facebook, Instagram, and YouTube for more personal financial information relevant to you!