Why You Should Start Investing in Your 20s?
Student loan payments, rent, building a career — many facets of the early adult years take up our time and attention. With such immediate concerns to deal with, it's no wonder many twenty somethings would put investing at the bottom of their to-do list. So, considering all the other priorities of establishing your adult life, why should you start investing in your early 20s?
Well, taking advantage of the long investment horizon your 20s provides gives you time to build wealth over decades and a chance to learn about the markets, maximize compounding returns, and take some risks along the way. Isn't that last one what your 20s are all about.
If you need help figuring out where to start, you're in luck. Financial Advisors at Universal 1 Credit Union are ready to discuss your financial goals and help you determine the best investment paths. In the meantime, let's look at all the reasons behind the importance of investing early for young adults.
Why You Should Start Investing in Your 20s
Many of us are guilty of spending our spare time tuning into reality TV or researching the next smartphone release date, but take some of those minutes to look into, say, Roth IRAs or mutual funds, and you could be reaping the benefits for decades to come.
Committing to investing while still in your first full decade of adulthood will foster strong financial habits and discipline that will pay major dividends. Think of it this way: The money in an investment account with 40 or more years to grow will reach peaks significantly higher than one with only a decade or two of deposits on its roster.
So, why should you start investing in your early 20s? First, let's take a closer look at the numbers.
Long-Term Investment Gains
Sure, investing early might feel like another burden on your wallet when you’ve got bills to pay and festival tickets to purchase. But you won’t think so when you harvest the benefits from decades of compounding interest.
Most investments earn interest on every dollar you put into them. But did you know that you can also earn additional interest on your accumulated interest? This is known as compounding interest.
Say you invest $500 into an investment account with an interest rate of 6% each year. After one year, you’ll have $530. After two years? $561.80. That’s because year two earned you 6% interest on your initial investment — plus the $30 in interest you earned the previous year.
As you can see, you don’t have to put more money in the account to keep earning interest on the previous year’s interest. But, if you did invest $500 a year, imagine all that compounding interest after 20 years. Or 40 years!
Just like taking a tumble when you lose your footing on a hike at age 25 has a lot less impact than it would at age 65, investing in your 20s is itself a risk management tactic.
Investment options like target-date or life-cycle funds take advantage of this by periodically rebalancing associated stocks, bonds, and other investments to optimize your risk based on how close you are to retirement. The younger you are, the more time you have to rebound if your high-risk (but typically high-reward) investments experience a loss.
Further, with time on your side, you can afford to experiment a bit with your portfolio. A diversified portfolio spreads out your risk so your eggs are not all in the same proverbial basket.
The best part about investing early is that you don’t need a giant lump sum to get started. Even a modest $50 per month is enough to get the ball rolling for your financial future.
As a general best practice, many financial experts recommend investing about 15% of your after-tax income. So, what does 15% look like for a 20-something? Let’s say you just entered the workforce and make an average of $2,000 monthly after taxes. That looks like $300 per month.
Of course, after rent, groceries, and entertainment, $300 might feel like a lot. But that’s another argument for the importance of investing early for young adults. Any amount is better than none. You can start with $150 (or less) and still have time to work your way up.
Take Advantage of Employee Benefits
Did someone say 401(k)? The retirement plan options available through employee benefits packages should be on every twenty something's radar and a huge motivator when assessing career and job choices.
While you might see a range of employer-sponsored retirement plans and pensions, we’ll use the 401(k) — the dominant workplace retirement benefit — as an example of early investing potential. If you opt into your company’s 401(k) plan, when you get your paycheck, a certain percentage of your take-home income will go toward your 401(k) account, which is meant for retirement.
Your employer may even match your contribution with each paycheck or at least contribute a percentage. Using the $2,000-a-month salary example, if you contribute 5% of your paycheck ($100) to your 401(k) each month, and your employer matches it, that's $200 a month going toward your future post-work life.
You can contribute up to as much as $22,500 a year to your 401(k). And, as long as you don’t make an early pre-retirement withdrawal, whatever amount of money you contribute will be tax-deferred until your retirement and will not be calculated as part of your current taxable income. Translation: More savings!
Creating a Sound Financial Foundation
Practicing different forms of saving and investing, researching the types of investments you most align with, and learning how to recover from investment mistakes or stock market dips are all the more valuable when you give yourself time to experiment.
The decades of life ahead of you will present endless financial choices, and you might not always make the right ones. But if you take the initiative while you still don’t need to apply wrinkle cream, you’ll build stronger habits and develop the knowledge you need to avoid financial mistakes when you’re older.
Further Resources on Investing in Your 20s
Still need more information on the importance of investing early for young adults? Check out these helpful resources:
Learn who you are as an investor. The University of Pennsylvania offers a handy investment guide with recommended apps, and information on how to assess your investing risk tolerance.
Put your decisions in context. The U.S. Securities and Exchange Commission recommends these 10 considerations before making an investment decision.
See what others are doing. This Fidelity study looked at investing differences, particularly among women, for people ages 18-35 and 36+.
It’s Never Too Early to Invest
If you’re new to investing, you might feel intimidated by all the options out there. That’s completely normal. It’s also why a credit union can become a valuable source of information and support.
Owned by its members, Universal 1 Credit Union is financially motivated to help you succeed. That means our Financial Advisors are never far removed from your success — they’re invested in it. U1 offers tailored and personalized products and services, including financial coaching, to help members reach their investment goals at any age. Learn more
Give your early investment strategy an even bigger boost with assistance from a partner guaranteed to be on your side. Schedule an appointment with a U1 free Financial Advisor and start making those gains today!
Source: Your Money Further™ Personal Money Solutions: Article: Why You Should Start Investing in Your 20s: https://www.yourmoneyfurther.com/personal-money-solutions/investing/why-you-should-start-investing-in-your-20s
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