The faster you can get your financial house in order, the better, because starting to save and invest at an early age provides you with a powerful ally: compounding.  This is financial speak for the cliché “making your money work for you,” and simply means earning interest on previously received interest.  A simple example is the best way to understand compounding:

Both samples earn 5% interest each year, so, why does compounding outperform?  It’s because by reinvesting the money earned each year it too earns a return, unlike the no compounding portfolio that just earns 5% of $1,000 each year.  So with compounding in the first year you earn 5% of $1,000, but in the second year you earn 5% of $1,050, and in the third 5% of $1,102.50, and so on.  To achieve the miracle of compounding, you only need to reinvest returns and start early.  This is a simplified scenario, ignoring market ups and downs, but you get the point – the compounded total more than doubles the non-compounded total.

So, if your short-term finances are in good shape and you’re salivating at the prospect of having decades of compounding on your side, then it’s time to take step one: Preparing to Invest.