If you’re thinking about investing, there’s a deluge of advice out there, from endless online articles to friends and family bursting with wisdom — but that doesn’t mean you can trust all of it.
“Some of the worst advice I’ve ever heard anybody give in terms of investing was my ex-husband to my younger brother,” Sallie Krawcheck, former Wall Street executive and founder and CEO of Ellevest, told Business Insider. “We were out for beers and my ex-husband told my younger brother, ‘You don’t have to worry about investing right now, you really don’t have much to invest. But what’s going to happen is when you get into your later 20s and 30s and 40s you’re going to make a lot more and you can start investing then.'”
Krawcheck was appalled. “My ex-husband did not understand the power of compounding,” she says.
Contrary to the advice that you should wait until you have a substantial amount to invest, Krawcheck recommends that everyone start in their 20s, even if you only have $50 or $100 to put in, because it will begin to compound right away.
“Over time [you will] have a return on that money you put in, and then you’ll earn a return on that return, and then you’ll earn a return on that return on that return,” Krawcheck explains.
Compound interest occurs when the interest earned on an investment earns interest on itself. Because of it, a little money contributed today will ultimately earn more than a lot of money contributed tomorrow.
CFP Sophia Bera explained it to Business Insider:
“If you had $1,000 in cash and just hid it in a drawer, it would still be $1,000 — and thanks to inflation, over time that $1,000 would be worth less. But if you invested it and earned an average return of 7% , in one year you’d be sitting on $1,070. In the next year, you’d earn 7% not just on the original $1,000, but on that $70 in interest, too — which means at the end of year two you’d have $1,145.”
The bottom line: The worst investing advice you can take is to avoid doing it altogether. Even if you can only contribute a little bit when you’re getting started, that adds up over time.