Brian O’Connell* says investing in your twenties gives you the early start you need to obtain financial security much sooner than you think.
Photo: Helena Lopes
Learning how to invest in your twenties can provide benefits, both in the short-term and especially in the long-term.
According to Provident Investment Management, investing early can result in greater investment gains, as opposed to biding one’s time and investing later.
Provident cites two average 25-year-olds, who make the following financial moves:
The first 25-year-old saves $5,000 per year, all the way through age 35, earning an 8 per cent average annual return on the investment.
The second 25-year-old waited until age 35 to start saving, and stashed away $5,000 until age 60, for a total of 25 years.
That investor also earned an average of 8 per cent in annual returns.
By age 60, the first 25-year-old had a total of $615,000 from their savings, from a total investment of $55,000.
By age 60, the second 25-year-old accumulated around $430,000 after a total investment of $130,000, after only 10 years of investing.
Even though the first investor only put $5,000 away for 10 years, they out-earned the second investor, who waited 10 years to invest, but invested for 25 years.
That’s the beauty of starting to invest in your twenties.
Through the power of compound interest, money invested early on in life grows more quickly and more abundantly than if you waited a few years into your thirties to start investing.
How to start investing in your twenties
There is no trick or magic bullet involved in making money through investing in your twenties.
All it takes is a good investment plan, the discipline needed to keep investing on a regular basis, the ability to choose the investment vehicles that have the best shot of maximising savings, and the element of time, which is needed to keep reinvested money growing in a portfolio.
Those are the cornerstones of successful investing in your twenties but there is more to the process than that.
These steps will get you on the right track in investing early in life and accumulating major financial assets in the process.
Be aggressive
Investing in your twenties gives you more flexibility than if you start in your thirties or forties.
That early start allows you to be more aggressive with your choice of investment vehicles since you have more time to recover from any investment losses.
Know that stocks have historically higher investment returns than bonds over the long haul, with stocks returning closer to 10 per cent on an annual basis, compared to 3 per cent for bonds, and 2 per cent for savings accounts.
Yes, stocks do bring higher risk, but the promise of more robust investment returns means investors in their twenties should take a decidedly stock-based portfolio focus.
Create an emergency fund
As an insurance policy against job loss or illness or injury that prevents you from working, build an emergency fund to tide you over through any tough times.
You may never need the money, but the peace of mind knowing you have a financial cushion while you save for the long term can’t be overstated.
Aim for an emergency fund equal to six months of your regular monthly income.
Choose a good brokerage or robo-investment platform
These days, there’s no shortage of investment managers to choose from — online and offline.
Investment brokerage and mutual fund firms offer a long history of reliable service, along with low investment management fees.
If you want to go the digital route, you can choose a robotics-based investment management platform, which use robo-based technologies to choose and manage your portfolios, at fee levels lower than the traditional brokerage and fund firms.
Talk to a financial planner
Nobody’s saying you should hire a pricey investment adviser to run the day-to-day management of your investment portfolios — although that’s certainly an option.
That said, there’s a tonne of value in talking to a flesh and blood investment specialist — someone who will take a sober, realistic view of your personal finances.
A financial planner can also provide a “big picture” viewpoint on your finances and walk you through the all-important process of establishing long-term financial goals.
Develop good financial habits
Saving money is all about setting goals and having the discipline to regularly put the money away to meet those goals.
Those are the habits you need to instil not only in your investment planning, but also in your day-to-day financial habits.
For example, you want to build a consistent record of paying bills on time and managing debt properly, which will help you build a great credit score that will save you money on interest when you do try to obtain credit.
Getting educated about money is the single most important step you can take to creating wealth, and there are plenty of reliable and productive places for a twenty-something to gaining financial knowledge.
Get creative and look for savings opportunities
It’s the smart investor who funds money to invest in often-overlooked places and turns that money into real wealth.
Taking money from places you haven’t thought of and applying it to your investment portfolio in your twenties is a great way to fuel your personal wealth creation campaign.
The takeaway on investing in your twenties
Father Time or Mother Nature (take your pick) has given you the great gift of time as a twenty-something investor — time you can use to start investing, leverage the enormous wealth creation power of compound interest, and engineer a wealth-creating machine that will last for decades.
Yes, it does take discipline and patience, and does require you to make some sacrifices along the way.
But building an investment portfolio in your twenties is one of the surest ways to creating financial security, both in the short-term and (especially) for the long haul — when you’re going to need the money most.
* Brian O’Connell is a freelance writer and former Wall Street bond trader.
This article first appeared at www.thestreet.com.
