3 Reasons to Start Investing in Your Early 20s
September 24, 2020 | Joyce Ibrahim
In many cases, being twenty-something means you’ve recently graduated and are probably still in your first job. For most, it also means you’re still trying to find balance between your job, expenses, entertainment, social life, and maybe your student loans.
With so much to juggle, investing doesn’t rank very high in a young professional’s set of priorities. It seems easier to put off investing until you start making more money and your situation is more stable. But can you really rely on that with COVID19 still posing a threat to jobs and, well, stability?
Essentially, investing is a way to save for the future, and your 20s are the perfect time to start.
Here are 3 reasons why you should make investing a top financial priority:
- Time is on your side
Disposable income is an area of concern for most young adults. But time is your greatest advantage, mainly owing to compound interest. Through compound interest, not only do you earn interest on your initial investment, but also returns on all the subsequent interest it generated.
Let’s say you invest $100 at age 20 at a 10% interest rate. The following year, you would have $110. If you keep that sum invested, it will earn another 10%. You would make $10 from the first year, plus 11$ from the current year, leaving you with $121. Interest keeps growing upon interest by the age of 27, your initial $100 would have doubled to $200.
All the compounding process requires is reinvestment of returns, and time, which you have plenty of.
Another gift of time is the opportunity to learn by doing. If you start investing early, you would have gained enough financial literacy and investing experience by the time you’re ready to make bigger moves. And the earlier you start, the better.
- Tuck money away for a rainy day
When you first entered the work force, you were probably puzzled by the number of people that were stuck in a job they hated because they were strapped for money. Investing early in your career allows you to build enough wealth to eventually enjoy financial freedom.
It also allows you to quit relying on your paycheck, as you diversify your sources of income. That way, you can save more money and won’t have to base your career decision on immediate financial needs.
While it seems too early to think about, your early 20s are the perfect time to begin preparing. If you want to retire early, or at least on time, it’s important to think about how you’re going to be making and spending money when you’re no longer working.
Your 20s are also the time to begin forming good financial habits. A large majority of young adults will spend more than they earn, leaving themselves even more vulnerable to instability. Investing early will help you gain the discipline and patience you need to form wealth-building habits.
By investing early, you are building a stronger safety net, whether for your long-term financial security, unexpected emergencies, or career moves.
- Take on more risk
Obviously, it is unadvisable for anyone of any age to take out their money and invest it in volatile ways. Young adults simply have a higher risk tolerance that those older than them. With over 30 years until retirement, you can afford to take higher risks than someone with only a few years. And in many cases, higher risks lead to higher yields.
While older professionals tend to prefer low-risk and risk-free investments, such as bonds, you have years of earning ahead of you, allowing you to build a more aggressive portfolio.
Being young often means you also have fewer financial responsibilities. You probably don’t have a family to raise or a house deposit to settle, giving you more freedom in the investments you choose.
Much like compound interest, high-risk investments need time to prove their profitability. But time will also give you a hand with risks. As you gain more investing experience, you will learn more about what risks to take, and how to navigate them.
With all the instability we are witnessing, saving and investing could be the wisest choice you make. If you often feel like you’re limited by the income you’re making, think of how much more constraint you’ll be facing if you’re no longer able to generate that income.
Investing in your early twenties gives you an opportunity to build solid foundations for a healthy financial future. It could also give you the financial freedom you need to lead your personal and professional lives the way you really want.
Looking for the right investment opportunities to get started? Learn more about our Youth Investment Plan here.
You can get in touch with Brakket Invest on firstname.lastname@example.org