The financial services industry tends to focus on how important it is to get started as early as possible. Starting to invest in your 20s provides a powerful advantage through compounding, but investors in their 30s, 40s and 50s have significant opportunities to build wealth and meaningfully improve financial outcomes.

There’s a common reaction from older investors that just get started - they hear the benefits of starting early and regret that they did not begin investing sooner. This sense of ‘missed years’ of compounding can discourage action, but we should reframe the issue instead of dwelling on what could have been. Every life stage has different advantages, and investors that are 30-40+ often possess financial strengths that younger investors lack.

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Mark has also put together a guide for investing in your:

Shani Jayamanne: This episode is brought to you by the Australian Shareholders’ Association and they’ve been supporting and representing individual investors in Australia for generations.

Mark LaMonica: And we’re both big fans of the ASA.

Jayamanne: We are.

LaMonica: They believe in a lot of things that we believe in. So, investor education, investor rights and just building confident and informed investors. And we’ve both been to a lot of their conferences and a lot of their chapter meetings. So, if you join the ASA, you do get to do that. You get to go to a local chapter meeting that’s in a community close to you. We’ve spoken at a lot of them and it’s always interesting. It’s always a really informed and engaged group of investors. So, I learn a lot when I go. Hopefully we say something that helps the people attending the meetings, learn something as well. It’s just a really great community. You do get access to their conference as well every year, which is great. We’re big fans.

Jayamanne: And I also write for their Equity Magazine. So, most months, there’s an article from me in there. And you also get access to that. But you also get access to those local events, as Mark said. And I think there are a lot of investors there that you’re able to speak to about your own investment philosophy and your strategy. You’re able to pressure test it. You’re able to speak to them about theirs. And I think that’s something that we both really value as well. So, the ASA have a great offer for Investing Compass listeners. Do you want to go through it, Mark?

LaMonica: It’s 50% off.

Jayamanne: It is.

LaMonica: I don’t know if there’s more that I should have gone through, but there’s a link. So, we’ll put a link in the episode notes. And maybe if you join, we can come speak to your chapter.

Jayamanne: Sounds good.

LaMonica: All right. So, let’s get into the episode. And the start of this episode, I think I talked about this before that you had the opportunity to go in and present to high school students.

Jayamanne: Yes, I did financial literacy courses. And we actually did an episode where I ran through some of the life-changing tips that I gave them.

LaMonica: Yes. But there were other people in the room, Shani, besides the high school students.

Jayamanne: Yes.

LaMonica: And that’s the inspiration for today.

Jayamanne: It is. I’m obviously really passionate about getting investors into the market early. And that’s because it does make a huge difference to your outcomes. And one way that I do try to do that is focus on the significant difference to return outcomes with an extra decade or two in the market. And I feel like this really does motivate young people.

I have a few graphs and models that I show that show that investing when you’re 20, as opposed to starting in your 40s, could result in a seven-figure difference to your outcomes. But I’m showing this in a room of students who have the time to make that decision. But there’s also teachers and facilitators that were also listening to the presentation. And there’s just a sense of quiet panic that they’re just a little bit too late, that they couldn’t make a difference to their outcomes in the same way. And that’s really because my presentation revolves around harnessing time and compounding to create wealth even with minimal investment. And it’s meant to get younger investors to understand that they’re in a prime position to change their lives.

LaMonica: And this isn’t the first time that you’ve gotten this reaction.

Jayamanne: No.

LaMonica: So, you do get this response before. People say that they wish they knew earlier. And while you’re trying to motivate, in this case, one group of people, potentially, you are demotivating another group that might be discouraged because they didn’t start right after high school or during uni. And it feels like – and I think we talk about compounding a lot on this episode – it maybe feels like if you’re missing those years, that it’s insurmountable to come back and build financial security and wealth. But obviously, this isn’t the case. You were just designing something for a very specific group of people. So, what are we going to talk about today?

Jayamanne: So, we’re going to focus on a change in perspective. Life is about using whatever advantages each of us have in the best way possible. So, for young people, that is time. For those who may feel like they’ve left it too late to invest, it’s often that they’re in a prime position to catch up.

LaMonica: Now, Vanguard, you always talk about this research from Vanguard. And they went in and they looked at – we had all sorts of things trying to motivate us to do different things – but they looked at what actually motivates investors to engage with their finances. And the key is pointing out the difference to outcomes once that action is taken. And it might be hard for someone in their 40s to take action if they are filled with regret for not making that decision in the 20s. But today, you’re going to motivate people in their 40s.

Jayamanne: That’s it, Mark.

LaMonica: A group of people close to my heart as somebody in my 40s.

Jayamanne: So, we’re going to talk about why it’s never too late. And let’s start with the good news of being in your 40s. And as you mentioned, Mark, you’re in your 40s.

LaMonica: So, you think I have some good news?

Jayamanne: Maybe you can talk about the good news.

LaMonica: Talk about the good news. That sounds like I am preaching on a street corner. But the good thing about being in your 40s, obviously, other than me, most people in their 40s have higher earnings and they have more discretionary income to devote to investment goals. So, it is easy to tell young people to invest, but the problem is a lot of young people don’t have any money to invest. And for people in their 40s, that may not be the case anymore.

Jayamanne: I mean, I’m not 40 yet, but I’m…

LaMonica: You’re getting close. Tomorrow is your birthday.

Jayamanne: It is. I didn’t think you were going to bring that up today. But I’m in my early to mid-20s. I was lucky to have $100 a week spare to invest for my financial goals. And as I progressed in my career, I’ve grown my salary and have more to invest.

LaMonica: And that is good. So, if we look at median salary, just to prove your point, Shani, the median salary for people between the ages of 25 to 34 is $63,000, according to the Australian Bureau of Statistics. And then we can compare that to someone who is between 35 and 44, sadly, an age bracket that I am no longer in.

Jayamanne: No longer fit into.

LaMonica: But the median salary there is $77,000. And then if we look at my age bracket, the 45 to 54-year-olds are earning a median salary of almost $81,000.

So, you also likely have a larger capital base to start with. So, Westpac has data on the average cash savings balance by age and this is cash that isn’t invested that is just sitting in a transaction or a savings account.

Jayamanne: So, for people between 18 to 24, the average balance is $13,069. For 25 to 29, it’s $19,165.

LaMonica: And for 35 to 44, over $29; 45 to 54, there’s a big jump, almost $53,000, and that’s just in cash savings. So, there is more money sitting there and more money coming in, and that is good news. But it’s also with the context that your earnings are more consistent and stable. You’re past the average age of 33 for caregiving related career breaks, and that leaves likely an uninterrupted earning stream until retirement.

There’s one last piece of good news, Shani. You’re already investing. So, you’re investing in superannuation, and you likely have been since your 20s. You have this established capital base in and out of super, and you can go and invest this if you haven’t started. So, the average balance for 40 to 44-year-old in super, $140,000 for men, $109,000 for women; 45 to 49, $193,000 for men, and $147,000 for women. And when you’re earlier in life, your average balance ranges between $8,000 and $24,000 in your 20s. So, you do have this capital base. You have some stuff to work with here.

Jayamanne: Thanks for all the good news, Mark.

LaMonica: I know. I’m feeling better about my age already. It will go down right after this episode when you continue to make fun of me for being old.

Jayamanne: Okay. But if you would like more information on how to optimize your super, I have written an account on how to maximize your outcomes, which you can find through the original link in the episode notes. And this particular piece was inspired by a Rainmaker study that said that 35 was the best time to take your super seriously. And I spoke about the mark difference to outcomes if you do invest earlier. But the Rainmaker study’s premise was simply what we were talking about today in the good news section. You’ve got a good capital base and regular payments coming in. And these regular payments are 12% of your salary during some of your highest earning years.

LaMonica: Now, I’ve gone through some hypotheticals here, but we also have to consider the realities of life, Shani. So, the difference between your financial firepower in your 20s and your 40s is stark, as we talked about. What these numbers don’t reflect are the additional responsibilities and commitments that come with age, something I’ve been resisting, not very successfully.

Jayamanne: The responsibility?

LaMonica: Exactly. Exactly. So, children are, of course, or so I’m told, an expensive endeavor. You may have caring responsibilities for aging parents. You may have large continuous financial obligations, such as mortgages or car loans, school fees. But all those numbers that we went through are net of these commitments. The cash savings bounce from Westpac and superannuation bounces from ASFA. So that’s all stuff that you can go out and invest. It’s dry powder for you. So, there’s definitely room here to make a difference to your financial outcomes and your quality of life.

Jayamanne: And I think let’s take a step back and speak about one of those models that causes a visceral reaction from people when I speak about time and compounding. And it’s a model that I run through in a lot of my articles, and we talk about it a lot on the podcast too. It’s from Morningstar Investment Management, and it’s the savings needed to save a million dollars by the time you’re 65. The older you are when you start investing, the more you need to save to reach the same end goal. And if you’re getting a 7% net return, the capital outlay when you’re 25 is $405 a month, or $194,000 in total. The market and compounding add over $800,000 to the total return. And when you’re 45, you need $1,970 a month, and you’re basically contributing 50%, and the market is contributing the other 50% to your total.

LaMonica: So, we can see in that data, it does help to start investing early. It does take some of that hard work off your plate. But it’s important to remember that time isn’t the only lever that an investor has. So, let’s move from hindsight to actually making a difference for people in their 40s. Now, what does it take to make up for those two decades of potentially not investing? And we do like example, Shani. So, I know you have one for us. Why don’t you go through it?

Jayamanne: Sounds good, Mark. So, let’s compare two investors who have different incomes and abilities to contribute to their investments. So, investor A is 25. They have $500 to invest per month and get a 7% return. By 65, they have $1.3 million from $240,000 in contributions. Investor B is 40. They earn more and have a stable income, so they can contribute $1,500 a month. They get the same return and end up with $1.25 million from $450,000 in contributions. So very similar outcomes, just another way to get there.

LaMonica: And investor A obviously has their monies worked harder for them. So, with that compounding, those extra years of compounding, it does lift the total comparative to that capital that they actually contributed. Investor B has been able to contribute more. So, it’s a shorter amount of time, but they do end up with very similar outcomes.

Jayamanne: And it’s easy to think of these examples at the surface level. But what’s behind these examples are the circumstances surrounding the additional investments. So, when you’re 20, spare cash to invest often comes from saying no to lifestyle experiences and forgoing holidays and leisure activities. In your 40s, spare cash may be more available due to higher salaries, bonuses and dependents becoming less financially dependent. And I think the key takeaway here is that this trade-off often means less sacrifice per dollar invested. So, Mark, you tell me, are your 40s a great time to invest?

LaMonica: I mean, I think they’re going pretty well for me. I think ultimately, you know, when you’re young, you obviously can’t imagine being in your mid-40s. And at least for me being in my mid-40s, I still see I’ve decades ahead of me. I know that money that I’m saving now and investing as well as investments I have can make a real difference in my life. I think it is a great time to invest.

Jayamanne: And I think investors do tend to fixate on those early missed compounding years. But what we tend to underestimate is how quickly higher contributions can compound.

LaMonica: And I think once again, to refer back to that example that Shani went through, that the monthly contributions were tripled. And so obviously this added more money to the account, but they also compressed decades of missing out on compounding into that shorter timeframe with very similar results. So maybe starting to invest in your 40s is not ideal, but you can really make a difference in your life. And that’s the whole point of investing in the first place. So, we would say make sure you take advantage of the particulars about your circumstances that do help out. And once again, establish a goal and start working towards that goal.

There we go, Shani. One last pitch for the ASA. Great organization. If you have any questions, my email address is in the show notes. You can ask me anything you’d like about the ASA. And once again, look for that link for 50% off. And thank you for listening.

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