Firstly, if you don't, your money will lose Purchasing Power - basically it will be worth less than it was when you started due to inflation.
The other reason to start investing now versus later is that you can get Compound Interest working on your side. This helps you earn 'Interest on top of Interest"; growing your money faster than simply stuffing it in a piggy bank. Time can be your friend.
But to invest, you need money...
While (often) accurate, this is generally a very large number and usually freaks people out - making some people jump ship completely on saving. Don't let this be you!
I think you should start with baby steps - creating the habit of saving and investing before you worry about the really big goal. If someone handed you a 'How to Train for a Marathon' running program and you had never jogged before in your life, you would probably not be too motivated. Right?
For the purpose of this article, I am going to suggest a very modest amount - between $25 and $50 a month. This is the dollar amount I talk to my classes about. It isn't going to pay for their education (or your retirement villa in the south of France) but it is an amount of money most of us can wrap our heads around.
If I suggested you go find $1000 a month, you'll punch me. I'd probably punch myself first. In the groin. If I'm going to convince you to start now, starting small is probably best.
Don't use the 'B Word'
We don't use the B-Word (Budget) in our house. I do use it in my lessons; but only to compare it to Dieting.
Budgets and Diets are very similar. People tend to make both too strict - and then fail.
They see some results early, but the unnaturalness of eating wheelbarrows of protein (Atkins Diet) or not ever going out and having fun (A sample budget restriction) soon makes the whole house of cards fall down.
The best approach to eating is to develop balanced, healthy habits that you can stick to and still find room for the occasional treat you enjoy.
The same is true for spending.
Our preferred phrase for this is "Spending Planning": balanced, healthy habits you can stick to and still find room for treats you like. (Read more here from us about spending planning featuring spreadsheets, tracking techniques and a dancing poodle, so stay tuned. Disclaimer: There is no dancing poodle)
The Pay Yourself First Approach:
Espoused by many, including financial planning Bible- The Wealthy Barber; basically, you take a flat amount or percentage off the top of your pay cheque and live off what is left. The theory is that if you wait and see what is leftover before investing, there won't actually be anything leftover, as we all spend pretty much all we make.
Wealthy Barber author Dave Chilton (among others) suggests 10% of your paycheque goes off the top to invest. I think it is a great idea, but I also think getting up every morning and running 5k is a great idea too (and I don't do that).
If my employer didn't already skim my pay cheque for my work pension plan contribution, I would not likely be paying myself first at all. Which is too bad, as Pay Yourself First means that every time you get a raise, your contributions to savings go up too and You Dollar Cost Average (keep reading, I'll explain this in a bit) by investing every time you are paid.
I also can hear the groans from everyone reading this as 10% of your income is pretty big, given many of us don't think we spend that much on groceries each month. If you can do it, fantastic. Do it and keep at it, especially if you don't have a pension or RRSP purchase plan with your work. If you can't, read on, all is not lost.
The Net Income Approach:
Look closely at how much you have coming in (for example, take-home paycheques, birthday money from grandma, etc) and look at where it is going (for example, add up your receipts, and your credit card and bank statements for a month).
If you are meticulous and careful, you can likely keep a piece of paper handy and write down purchases as they are made or bills as they are paid. If you have never tracked your spending, definitely try it.
When you see where your money is going, you will start to find places you could cut back without too much pain. Some examples: we fly low on cheap Internet, we don't have cable or satellite and we get by on a single cell phone.
If these sound too extreme or make you ask 'Why bother living?', some non-Luddite ideas include: avoid the lottery, make your own coffee or pack your lunch for work.
Even one fewer restaurant meal a month would probably get you there. It may mean a bit of change to comfortable habits, but any of these would get you very close to our $25-50 beginner investor goal.
How Often to Invest:
Dollar Cost Averaging (DCA) is another reason I wanted you to find $25-$50/month. I don't want you to save up all your money for one year and then invest it all at once a big lump. That is a bit like playing roulette- hoping you get a good price for whatever you are investing in. Investments go up and down in value, so you risk buying your chosen investment at a high point.
Dollar Cost Averaging means you invest the same amount every month (or week) typically via auto-withdrawal from your bank. Doing this over time will mean you will buy more when prices are down, and less when prices are up - the net effect being you get a better average price for whatever investment you are buying.
Pretend you decide to buy exactly $50 in fuel every time you go to the gas station. One week, the price dips to $1.00/litre, so your $50 buys you 50 litres. Next time you buy, a long weekend has come and fuel prices spike to $1.25/litre. Now your $50 budget only buys you 40 litres. However, when you add week 1 with week 2 ($100/90 litres) - you get an average cost of $1.11/litre. You usually can't do this with gasoline in the real world - you need gas when you need it - but it works all the time with investing.
So, the Bottom Line is:
Start by finding a little bit of money and invest it frequently and predictably. We still haven't talked about what you might invest it in, or what to do if you have bills that might need paying with that money you found. All that matters at this point in our discussion is that you can squeeze a bit of money out of your spending to direct to investing instead. And still enjoy the occasional movie night.
What are some areas you might consider cutting back in to find your $25-50 a month?
The "Be Your Own Investment Manager" Series:
Part 2: How Much and How Often to Invest
Part 3: Invest in Your Debt?
Part 4: Risk and Return
Part 5: Mutual Funds
Part 6: Simple Investment Options
Part 7: Saving for Retirement (RRSPs)
Part 8: The Colour and Psychology of Money
Part 9: Saving for Education