People in their 20s often put off investing for a variety of reasons. Some people want to wait until their financial situation becomes more stable, and others hope to make more money before they start investing.
Whatever the reason, putting off investing is a mistake. People in their 20s are actually in a prime position to enter the investing market, even if they have student loan payments and less-than-ideal salaries. The primary reasons to start investing in your 20s include the following:
Time is on your side.
The best reason to start investing while you’re young is to take advantage of compound interest. Sometimes called “interest on interest,” compound interest is the proceeds you make from reinvesting the profits from an investment.
People who invest even small amounts at a young age enjoy a bigger payoff in the long run. In fact, Albert Einstein called compounding the “eighth wonder of the world” because of its ability to generate sizeable returns, even with a small initial investment, provided that people make the investment early.
For example, someone who invested $10,000 at age 20 with a 5-percent interest rate would end up with more than $70,000 when that person hit 60 due to the effects of compound interest. However, someone investing the same amount at age 30 would accrue only $43,000 by the time he or she reached 60. If a person invested the same amount at age 40, the return would only be $26,000. While this is still a good rate of return, investing early nearly triples the ultimate return amount.
Practice makes perfect.
No one enters the field of investing as an expert, and people need time to learn from their successes and failures. When you start investing in your 20s, you can get over the learning curve quickly so that by the time you are making good money you will know exactly what to do with it. You also probably have more time to study investing in your 20s, so you may ultimately become a better investor. To help you navigate the financial markets, you should consider finding a mentor who can teach you the ropes, but don’t be afraid to venture out on your own.
People naturally become more conservative with their investments as they near retirement age because the stakes are higher. In contrast, those in their 20s often feel freer to experiment because if something goes wrong, they still have plenty of time to recover. They also likely learn some valuable lessons along the way that they will not repeat later when they need to protect their assets more carefully.
Your spending habits will improve.
One of the often-overlooked benefits of investing early is the important financial lessons that doing so imparts. For example, having to set aside money to invest quickly teaches you the true value of a dollar and helps you become more mindful of your spending habits. Spending $4 on a coffee, for instance, becomes less acceptable when you realize that you can make your own at home for $1 and invest the remainder.
Further, people in their 20s often tend to spend frivolously because they are making a real income for the first time in their lives. Investing helps curb this frivolity and instill responsible spending habits very early.
The changes in spending habits will pay off in the long run when you can afford things that other people cannot. Because of compounding returns, your nest egg can provide a profound sense of security. Investing early means that you have more money in case of an emergency, so you don’t have to worry as much about making it through tough times.
Younger people have a tech advantage.
Young people are typically much more familiar with current technologies than older individuals are. This is something that they can only take advantage of in their 20s. Today, there are a number of different online trading platforms that each has proprietary tools for fundamental and technical analysis of market and investment performance. Older investors are less likely to take advantage of these tools unless they are professionals, but younger people will readily participate in forums, chat rooms, and other investing resources.
Social media, smartphone apps, and other opportunities provide a great deal of support to investors, and these new technologies are always most accessible to young people who have grown up with them. Everyday investors in their 30s, 40s, and 50s are much less likely to take advantage of these technologies, which gives young investors a clear leg up on their competition.
You are investing in human capital.
People tend to consider stocks, bonds, and other traditional vehicles. In your 20s, you can have a broader interpretation of the phrase. Consider investing in your future by giving yourself credentials that can earn you more money down the line. While going back to school for a master of business administration will generate limited returns for someone who is 45, the same degree could prove an excellent investment for a 25-year-old worker.
From an individual perspective, individual capital is the sum of all future wages. Invest in your future by increasing your earning potential with a new degree, more on-the-job training, or some advanced skills. These investments involve both time and money, but they can pay off significantly in the long run.