Investing is the ultimate life hack – it can morph your hard-earned dollars into a wealth-generating machine. That’s right, investing potentially makes you more money by making your money work harder and smarter.

And the two ingredients that are crucial to optimising your investments are time and compounding. That’s why it’s always better to invest sooner, rather than later in life.

The magic of compound interest

When you invest, you earn returns or interest. It may be tempting to cash out or to take that money as “free money” that you can spend freely. But doing that makes you miss out on a huge component of investing.

If you choose to reinvest the money instead and if your investments and the market continues to do well, what it does is earn even more money. And when you consistently reinvest your returns, it creates a snowball effect where your gains make more gains for you. That’s called compounding.

Imagine your investment as a snowball at the top of a snowy hill. Your initial capital is like the small snowball you start with.

As time passes, the snowball begins to roll down the hill, picking up more and more snow along the way. The longer it rolls, the larger it becomes, thanks to the accumulating snow. In this analogy, time is like the slope of the hill, allowing your investment to grow and compound.

Similarly, even if you start with a small amount of money, the longer you allow your investment to compound, the more it can grow.

Time also plays a crucial role in the compounding process, just as the slope of the hill is essential for the snowball to gain size and momentum. You can think of the length of the slope as the passage of time – the longer the “time”, the larger the snowball will grow.

Hence, over time, the compounding effect can turn a small amount of money into a significant financial snowball.

The benefits of starting early

Now, let's debunk a common thought that most people have: "I'll start investing when I have more to spare." However, if we do some number-crunching, it will help illustrate why this line of thinking might cost you more than you realise.

Meet Sarah and Alex. Sarah started investing $500 a month at the age of 25 and stopped after just 10 years. Alex, on the other hand, waits until 35 to begin investing and diligently puts in $500 a month for 30 years. Fast forward to age 65, and you'd be surprised – Sarah, the early bird, actually earned slightly more money.

Case study of Sarah and Alex

The moral of the story? Starting early has a compounding advantage that can outshine contributions that are larger in size but made later. It's not just about the size of the nest egg, it's about the time it is given to incubate and grow.

Learn valuable lessons when you are younger instead of older

While investing is about amassing wealth, it's also a journey of self-discovery and financial education. Even if you're starting with small amounts, you'll learn invaluable lessons that will serve you well throughout your life.

Think of it as a financial apprenticeship. You're not just growing your money, you're growing as an investor. These early experiences help you understand your risk tolerance, investment preferences and financial goals. It's like learning to ride a bike – the wobbles and falls teach you how to navigate the twists and turns.

As you invest, you're not just accumulating dollars, you're accumulating wisdom. And the insights gained from your early investment endeavours can be the compass guiding you through the complexities of the financial landscape in the years to come.

Time is your best friend

In investing, time is a formidable ally. It's not just about the money you put in, it's about the time you give it to flourish and the lessons you learn about investing that will serve you well in the future. So if you're pondering when to start investing, the answer is clear – it’s now.

The earlier you begin, the more time your money has to work its magic. Remember, it's not just an investment; it's an investment in your future self. Start now and thank yourself later.

Content sponsored by FRANK by OCBC

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DISCLAIMER

This is for general information and does not take into account your particular investment and protection aims, financial situation or needs. You may wish to seek advice from a financial adviser before making a commitment to purchase an investment product. In the event that you choose not to seek advice from a financial adviser, you should consider whether the investment in question is suitable for you.