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Being a young investor might be the smartest move you’ll ever make.
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- Investing
Key takeaways:
- The sooner you start investing, the more you can earn.
- Compound interest helps your investment grow at an accelerated rate; the more time you give it, the greater opportunity for compound interest growth.
Young investors have many options for saving; everything from money market and certificate accounts to 401(k)s and IRAs, even buying a home can give you long-term earnings opportunities.
Do you have big plans for your life? Start investing now to make sure you can afford to do it all.
3 Reasons why you should start investing young
1. Benefits of compound interest
By investing earlier and longer, you have a jump start in the amount of money you’ll have when you’re older. And we’re not just talking about the money you put in—we’re talking about compound interest.
When you take the interest you’ve earned from your investments and reinvest it, you’re taking advantage of compound interest. You are not only earning as the investment itself appreciates, but you’re also earning interest on the interest you earned. This creates a snowball effect with your money because your earnings grow exponentially. The longer you’re able to keep earning compounding interest, the more money you may eventually have.
Compound interest is not just for savings accounts. Stocks that pay dividends usually generate compound interest if you reinvest the dividends, so be sure to choose this option if you can.
Let’s say you have $500 you want to invest and have decided you want to save an additional $500 each year until you’re 60. Here’s the difference between starting to invest when you're 20 years old versus when you're 40:
$500/year at 6% interest for 20 years, age 40 to age 60 = $21,099.93
$500/year at 6% interest for 40 years, age 20 to age 60 =$87,166.70
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
You would end up with more than four times the amount of money by starting early! That’s the power of compound interest and investing young. And what’s even better? As you advance in your career and earn more money, you’ll have even more to invest down the road.
Financial professionals recommend putting 10-15% of your income towards retirement. That may seem like a lot of money now, but it will become an easier goal to reach as you advance in your career.
2. Resiliency and risk tolerance
Investments have ups and downs, and financial professionals tell us that, with the right portfolio mix, the best way to survive a volatile market is to ride it out. Economic conditions have a way of smoothing themselves out over time.This means thatage is an important factor to consider when weighing risksin investing.
Younger people can take on more aggressive investments with generally higher rates of return because they have more time to ride out rough patches in the markets before they reach the age of retirement. Higher risks equal higher rewards—if you’ve got enough time for your portfolio to work through the economy’s ups and downs.
3. Opportunity
Life changes fast—often faster than you expect.There are countless stories of people reaching middle age and suddenly realizing they’ve done almost nothing to save for their future. Not a great feeling.
By investing when you’re young, you’ll have greater command over what your future looks like. It gives you options. Having a lot of money doesn’t mean you have to stop working, but wouldn’t you rather be able to make the choice yourself? There are many people that don’t have any option but to keep working because don’t have enough saved for retirement.
How to start investing when you’re young
Mike Klopfer, a Certified Financial Planner for Global Retirement and Investment Services with more than 15 years of experience, has some smart advice for young investors.
“I know young people are getting pretty tired of hearing others tell them to cut out their morning coffee in order to start saving. I’m a firm believer that you don’t have to make yourself miserable to plan for your future.
One of the easiest things you can do is to take advantage of an employer-matched 401(k) if your job offers one.Let’s say you make $30,000 a year and contribute 1% of your income—around $300 a year.You probably won’t even notice it’s gone from your paycheck, and you’ve already started saving.
If you don’t have a 401(k) option, or you’re worried about what life might throw you—like if your car has been making strange noises lately—I get it. I’ve been there too. If you’re hesitant to lock up your money, try setting up your banking app to make an automatic $20 transfer from checking to savings every two weeks. This way, the money is still accessible if there’s an emergency. And if you don’t need it, by the end of the year you’ve got $500 to work with, either as an emergency fund or to invest in something like an IRA.”
What should you invest in when you’re young?
When you’re just starting out, you have several good investment options.
- 401(k)s, especially if they are employer matched—don’t pass up on free money!
- Roth IRAsare often recommended for younger investors because they’re taxed on contribution, not when you withdraw for retirement. That saves money because you’ll likely be in a higher tax bracket when you retire.
- Certificate and Money Market accounts are all good options that offer a higher rate of return than a standard savings account. A money market account is a good choice for your emergency savings because you can still access the funds if needed.
- Home buyingis a big step in life, but if you can afford to buy and you’re going to live in the home for more than 5 years, it may be a better option than renting because you’ll start to build equity.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.
You’re not in this alone
Managing your finances properly can feel a bit lonely.
Are you concerned about making the right decisions? Worried about missing out on a better option because you’re new to investing?
Global Retirement and Investment Services has a team of veteran financial professionals dedicated to helping you make smart, deliberate decisions about your financial future—so you’re never alone when it comes to your money.
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