- Why should you make investments in your 20s?
- 7 tips to help you start your investment journey
- Final thoughts
Making investments in your 20s might seem like the wrong time to start. However, It is never too early for you to start!
Even though you are currently a broke college student or a fresh graduate. This article might just be the motivational push you need to start investing today.
A great benefit of Investing in your 20s is that it can lead to early retirement. When you make investments in your 20s, you get to prepare for your future and retirement years.
If you want to learn how to invest in your 20s, then you are in the right place. In this article, I will be sharing 7 amazing tips that will help you on your investment journey. So, stick around till the end.
Why should you make investments in your 20s?
Still not convinced there is an advantage to investing heavily in your 20s? Here are a few good reasons why you should.
It helps you gain great financial management skills
Managing finances effectively is a skill most people in their 20s do not have. If you spend money on things you do not need, you must learn how to manage your finances. Making investments in your 20s will teach you to put your most important commitments first.
It will also teach you how to correctly manage your finances and help you spend money on things that matter most.
Once you learn how to manage your finances early, you will greatly benefit from this skill in the future. You may also be able to afford all the things you want in future if you put in the right amount of time and effort in investments.
While it’s true that you may not have a lot 0f money in your 20s, time is one thing you have on your side. You get to gain passive income on your investment over some time. And the earlier you start, the better.
Let's say you invest $500 in your 20s. By the time you are 60, your investment will grow to approximately $22,000 based on a 10% annual interest rate.
In the words of Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't pays it”.
Better ability to handle risks
Some investments come with a high level of risk. People in their 20s can handle more risks because they do not have a lot of monetary responsibilities.
Also, they have much more time and opportunities to make more money if an investment goes wrong.
The older you are, the more responsibilities you have, like taking care of family needs and paying medical bills. If you wait to invest when you are older, you may not be able to handle more risks. You won’t be able to handle as many risks because you will have more to lose.
The world is becoming a global village, which means there is no better time for you to invest than now. Thanks to the internet, you can easily get information and investment tips.
There are also many apps for cash and social media platforms that you can use to improve your investment skills further and learn from the experiences of others.
You get to gain knowledge through experience
Investing is a fairly difficult skill and takes a significantly long time to master. When you make investments in your 20s, you have a long time ahead of you to perfect your skills… by learning from your failures.
You will have more time to experiment with different methods of investment till you find what works for you.
Substantial savings for your retirement years
Do you want to retire early? Make investments in your 20s. Not only do you get to retire early, but you will have enough money for all your needs. However, you may not save as much if you wait to start investing later.
Not investing in your 20s can strain your lifestyle and make it difficult for you to meet your family's needs.
You can conceive and grow a business
Your best ideas and growth naturally rely heavily on financial investments. Many financiers prefer to back startups since they help bring about the development of new employment and goods. They get a kick out of the challenge of starting something from scratch and seeing it through to the point where it generates a healthy profit.
7 tips to help you start your investment journey
Below are a few tips to help you start your investment journey.
Outline your investment goals
For you to be successful on your investment journey, you have first to know what your goals are. Do you wish to retire early? Or do you want to invest so you can fulfil other short-term goals, like buying a car?
To outline your goals, you can write them down and group them into short-term and long-term goals. Knowing your goals will also help you determine what types of accounts you should have. And It will help you know what kind of investments you should make.
Another thing you have to determine before you make investments is how well you can handle risks. It should be no surprise that some investments come with different levels of risk. For this reason, you need to know how you will react if an investment does not go well. However, the good thing about investing in your 20s is that you still have time to compensate.
Invest in a retirement plan that your employer offers
A great way to make investments in your 20s is through the retirement plans offered by your company. Some companies give employees money when they save for retirement through 401k plans.
Most employers in America offer a 401(k) plan. Never heard of a 401k? It is a savings plan created for saving for retirement. When employees enrol in a 401(k)! They consent to have a portion of their salary deposited into a savings or investing account. There's a chance the company will match some, or all, of your investment.
Your employer may give many investment opportunities, typically mutual funds, from which to pick.
A great thing about 401k plans is that they have several tax benefits. You will also get to reap the rewards of compounding with 401k plans.
There are mainly two types of 401k plans, the traditional and Roth 401k plan.
With the traditional plan, your contribution for the 401k will be deducted directly from your gross income before tax deductions. Your annual taxable income will be decreased by the number of your contributions per year.
Neither the initial employee contribution nor any subsequent investment earnings are subject to taxation. Only when the employee withdraws the funds from the plan, usually when they retire, will it be subject to taxation.
However, with the Roth 401k plan, you put away a portion of your paycheck after taxes have already been taken out. Therefore, you will get no tax benefits annually. Plus, your contributions and investment earnings are not subject to further taxation upon withdrawal after retirement.
Get used to taking risks
Here’s the thing, all investments will come with different levels of risk. Many investors are afraid to take investment risks, and most decide to play it safe.
If you trade stocks, there is a chance that unfavourable market conditions can reduce their value. But if you never take the plunge, you may never reap the benefits of investing. Therefore, you must learn to get used to taking risks.
When you take risks, you may reach greater heights with your investment than when you do not.
It is common knowledge that an investment's potential return is proportional to the degree of risk it presents. The idea behind this is that those ready to take financial risks for higher returns should be compensated for doing so.
What is a risk? Risk is uncertainty about your investment. When you make investments in your 20s, you must make smart choices, which can be considered a risk.
Other risk factors include how easy it would be to make money from your investment. Also, the number of investments you have can be considered a risk. The more investments you have, the riskier it is.
Slowly increase the amount of money you save
Many people in their 20s do not have good saving habits. Most spend all their expenses on things they do not need without a solid plan for the future. If you do not already save! try to start now by putting a small portion of your funds in a savings account monthly. Try to slowly increase the amount you save each month slowly.
If you start saving now, you will not have to take extreme measures near retirement age. An online retirement calculator is a good way to save for retirement without a 401k plan. That’s because it will tell you how much you should save every month to help you reach your savings goals.
If you are someone that struggles with saving money, you can try to start tracking your expenses. You need to know how you spend your money and the things you spend it on. Tracking your expenses, will help you discover if you spend your money on unnecessary things.
A good way to track your expenses is to write everything you spend your money on. You can also take advantage of expense-tracking apps.
Create a savings account for your short-term goals
You should not just create a savings account for your long-term goals. You can also create a savings account for your short-term goals, like buying a house or a car.
Ensure that you store it in an account that makes it easy for you to withdraw your funds. Putting all your funds in stock is not advisable because emergencies may arise.
You can use savings accounts or a Certificate of Deposit (CD) if you need to save for an emergency.
Never heard of a CD? Certificates of deposit (CDs) allow investors to earn interest on a quantity of money for a predetermined time.
Unlike savings accounts, certificates of deposit require the money to stay undisturbed for the term.
If you touch the funds, you may be subject to penalties and interest loss. CDs often provide higher interest rates than savings accounts to compensate for their limited access to funds.
Utilize the services of a financial advisor
In addition to online resources, novice investors can benefit from meeting with an actual financial counselor.
It may be pricey, but they'll help you figure out your goals. Financial advisors will also determine how much risk you can handle. Moreover, they can advise you on how to allocate your retirement savings.
A financial advisor can also help you make smart investment decisions by applying their knowledge and experience. A financial advisor sees the big picture and will be a great guide.
Clear all your debts
Young people's mounting debt is a significant obstacle when making long-term investments. Most young people have debts such as student loans that consume a substantial amount of their monthly earnings. However, a sizable portion of today's youth also carries substantial credit card and auto loan balances.
Debt is problematic because it decreases your ability to make money. A monthly salary of $3,000 would leave only $2,500 after spending $500 on debt payments.
Ideal circumstances would see you with no debts to pay off. However, you likely know that this is not a perfect world.
If you're carrying debt… and hoping to put some money to work in the stock market, you'll need to strike a balance.
The ideal plan is to invest all surplus funds and put only the bare minimum toward paying down debt. That will make it much easier to benefit from the compounding of earnings possible through investing.
An excellent way to start your investment journey in your 20s is by identifying all your goals. Even if you do not have enough funds to invest in your 20s, you can start small by investing a little.