WHEN TO START INVESTING?

Most people realize that if they don't invest their money, at some point they will grow old, be broke, and be screwed.  The question that I am most often asked by younger people (20s and 30s) is, "when should I start investing?" The question is almost always immediately followed by, "how much money do I need to get started?"

The answer to the first question is the easiest: You should have started investing years ago!  The magic of compound interest is one of the great wonders of the world.  Once you understand its magic, you will have wished you invest the very first birthday check you got from grandma vs. buying that GI Joe.  Let's take a look at what I mean:

Let's pretend you are 25 years old and only have $1000 saved up that you would like to invest. Let us also assume that you are going to earn 10% average interest on an annual basis. Here is what you your money would earn over the next ten years;

Today - $1000

Year 1 - $1100

        2 - $1210

        3 - $1331

        4 - $1464

        5 - $1610

        6 - $1771

        7 - $1948

        8 - $2143

        9 - $2357

      10 - $2594

Not bad. In ten years time you have more than doubled your money. But had you started just five years earlier, you would now have $4178, four times the amount you started with!

In reality, you would want to make a couple of adjustments. First, you would want to regularly contribute to your investments.  Second, you would ideally want to achieve returns grater than 10%.

Another thing to keep in mind about the real world is that many investors lose money as well.  And if you haven't started investing yet, it is likely for one very real and very valid reason: you know that you don't know what your doing, and thus you understand you are likely to lose money!

Unfortunately, many people never make it past this point because they are seized by what I like to call "financial paralysis." They realize they should be investing, they look at a financial page on the Internet, and after about 20 minutes they decide the whole thing is insanely complicated and beyond their comprehension. The smarter of those with financial paralysis then set aside an amount of money from every check to invest in a 401k or Roth IRA so somebody else can do their investing for them.

There is absolutely nothing wrong with this approach... until the market crashes (as it did in 2008). Then you realize half your retirement is gone and you have nobody to blame but yourself.

So, in response to the second half of the question, my reply is, "start small."

"Small" means different things to different people. But you should only start investing with an amount that you can afford to lose.  But with the free stock tracking software found on nearly every financial page on the internet, that amount can be as little as $0 through the use of "play money."

I recommend using real money, preferably an insignificant amount.  Just understand that when you are starting, you are likely to make mistakes.  By using real money, no matter how small of an amount, you can feel the pain of these mistakes.  The point when you begin is to learn.  Making money with your investments will come later.  Just like when you learned to swim you started by holding on to the edge of the pool, or when you started riding a bike you had training wheels, when you begin investing you should begin with a small amount of capital.

Then, after you begin learning what you are doing and begin to feel more confident, you can start to wander away from the edge of the pool and gradually into deeper waters.

Whether you go on to become the investing equivalent of a deep sea diver or the person who stays in the shallow end of the pool is dependent upon a number of factors that I'll get into another time, but the point is that everybody should learn to swim. Otherwise, you are bound to eventually drown in this ocean we call life.