How can you take good advantage of your prime earning and investing years? In the world of personal finance and investing, there are a few axioms that everyone has heard at least once in their lives. You do not have to be an investor to understand what Wall Street traders mean when they say “buy low, sell high.” The same can be said about the expression “it is never too early to start investing,” but the reality surrounding this principle of personal finance is that many of us fail to heed it or put it into perspective.
When we say that it is never too early to start looking into investments, we are echoing the personal philosophy of Warren Buffett, the famous American investor whose net worth exceeded $130 billion in 2022. Buffett is the perfect example of someone who got an early start with regard to building a solid investment portfolio; when he was still in high school, Buffett used to save up a substantial chunk of the $175 he earned in a month delivering newspapers. His first savings account had a compound interest feature that he has credited as being the best investing decision he has ever made.
Buffett’s accountants estimate that more than 50% of his net worth has been generated through a robust compounding strategy. His commitment to depositing profits into various accounts paying compound interest can be described as being religious, and this is something he emphasized at the age of 68, when he addressed Berkshire Hathaway shareholders at the 1999 annual convention. This was when Buffett mentioned his “long hill” approach to investing.
The Snowball and the Long Hill
What the Oracle of Omaha refers to when he talks about a long hill is more formally known as an investment horizon, which is the term that defines how long investors plan on holding onto a portfolio. In the case of a portfolio similar to the one Buffett has put together over many decades, we are talking about a very long hill because of the compound interest strategy. Since the returns that can be generated through compounding are exponential, you want this hill to be as long as possible, and this either means living to an old age or starting when you are still young.
At the top of the long hill is a snowball that represents your initial asset portfolio. For many young investors, the cash on hand they can use to fund their first investment will only be enough to make a little snowball. Increasing the size of this snowball as it rolls down the long hill is up to investors, and one of the best ways to accomplish this is with a disciplined compound interest strategy.
Buffett himself will tell you that luck has played a part in his success; to this effect, he often cites the fact that he does not suffer from major health issues at the age of 91, thus making his hill even longer. Naturally, investors do not know if they will make it to this age, which is why it only makes sense to get started during their prime investing years.
Prime Investing Years and Prime Earning Years
According to many financial planners, your prime earning years are those when you start gradually experiencing success in your professional career or business endeavor. These are not necessarily the same as your prime investing years, which can start in your teens, but they will overlap at some point.
As a young person, your prime investing years will be easier if you keep your expenses low, save for the long term, and make the decision to get started as early as possible. The main concept here is that as you get older, you have less time to build wealth because time is a factor. When you are in your 20s and 30s, you have time to get serious about building an investment portfolio that can help you get closer to your financial goals. However, as you get older, the investment horizon that you plan on is the one that affects your ability to make a difference.
Naturally, if you have a shorter investment horizon, your opportunities to make a difference are limited. If you want to be able to save as much as possible to build a compounding portfolio, you should work toward doing this as soon as you can.
During the aforementioned 1999 Berkshire Hathaway convention, Buffett was asked for advice he could give to people in their 20s who had $10,000 on hand to invest. He was unequivocal in his recommendation of setting up a high-yield savings account or some other safe instrument with a compound interest feature, but he also mentioned that S&P 500 index funds with low management fees were worth looking into.
Based on the above, let’s say a college graduate decides to put all of her $10,000 into a compound interest savings account at the age of 25. As of March 2022, the best offer in this regard was NY Community Bank with a 0.70% annual percentage yield applied on a daily basis. Since this college graduate is living her prime earning years, we can assume she will be able to contribute $250 to her compound interest account on a monthly basis. When we run this information through our Compound Daily Interest Calculator, we can see that this young investor would have transformed her $10,000 investment into $41,799 by the time she turns 35.
Earning Interest on Profits and Account Balances
Young investors do not have to limit their portfolio strategy to savings accounts. Compounding allows you to earn interest on the interest corresponding to your account balance, which you should make a firm commitment to increase through regular deposits, but the funds do not have to come solely from your salary or business revenue.
Buffett has made it a point to deposit investing profits into his compound interest accounts in order to make a larger snowball. You can do the same with the understanding that you only invest money you can afford to lose; in other words, cash that is left over after you have satisfied all household and personal expenses.
In our example of a college graduate with $10,000 to invest, she has the option of depositing half into a high-yield compounding account, and the remaining $5,000 could be invested in an exchange-traded fund (ETF) that tracks the S&P 500. She could also choose to become an active forex trader using the $5,000. The key would be to take those investing profits and deposit them into the high-yield account. This is the kind of strategy that Buffett applied during his prime investing and earning years, and it has never failed him.