The best tips for investing in your 20’s
Talking about investing evokes different emotions in everyone. Some get scared by the thought of it whilst others laugh and will tell you about their best-performing stocks. If you would like to learn more about stocks then you might find my earlier post interesting. Here, I explained what stocks are and the different sorts that are available. But when you are still young investing, in general, can seem daunting. However, there are some serious benefits to investing when you’re still young. Here are some tips for investing in your 20’s.
#1 Don’t fear investing
Investing can seem daunting, however, it is not that bad once you know what you are doing. Yes, there is some risk attached to it, but once you know about these you are empowered to decide if you are willing to take the risk or not. Don’t give up on it all along because of the stories about market crashes and Ponzi schemes. Start small and once you are more confident you can scale up.
It is in our human nature to avoid risk, however, do realize that the evolutionary standpoint of this was to keep us alive. Stocks or other investments do not have the capacity to kill us so this fear is a little too exaggerated for the subject at hand. On the other hand, there are major benefits to investing in your 20’s. Avoiding it because of some risk is messing with your financials in the long run. So, what should you do when wanting to invest whilst minimizing risk?
#2 Learn about investing
Since personal finance and investing are oftentimes not discussed in schools it is important to educate yourself. When learning about the subject you will become more familiar with the different forms and sorts of investing whilst also familiarizing yourself with the risk attached to the investments. Maybe my post about how to start investing in stocks can help you out. Here are some things to keep in mind when learning about investing:
The difference between investing and saving
Oftentimes people save their money instead of investing it. Whilst it is wonderful that money is saved instead of being spent it does not give the best return on investment. At this moment even high-interest savings accounts give a low interest (around 1% or lower). Whilst, for example, the stock market has an average return of around 8% yearly. This means that if you keep your money in a savings account instead of investing it you are missing out on some money. Continue this year-after-year and this can become a quite significant miss.
My suggestion would be to keep some emergency money in a high savings account and invest the rest. How much money should you keep as emergency money? Well, it depends on your situation but oftentimes people have about 6 months of living expenses in their emergency fund. This would give you around 6 months to get back on your feet in case anything happens (maybe even more if you live frugally).
Search for all the answers to your questions
One of the most important things is to know what you are investing in. Therefore “why?” will be your best friend. For example, if a stock drops significantly try to figure out why this is. When you are new to investing you are more susceptible to making decisions before having all the important information. Therefore, I suggest learning how other people investigate their investments before buying and reading books about how to review stocks. I myself am currently reading Fundamental analysis for dummies by Matthew Krantz (book review coming soon). And whilst this might sound a little silly I do still learn some new things from it. As far as blogs go: Nerdwallet also has a great article about reviewing stocks and the Motley Fool has great investment content as well. Besides figuring it out by yourself you can of course also hire a professional to help you with your decisions. However, with this, I would advise that you try to learn from the professional instead of letting them just take over your work.
The amount of risk you (are willing to) take
It is my belief that when you are investing in your 20’s you can take on a bit more risk than when you are older. This is because you still have time to fix your misses. However, this does not mean that you should just invest in everything or start gambling your money. What this does mean is that if you have a well-diversified portfolio with some stable investments like index funds you could have a few riskier investments which potentially have a higher return, like small-cap stocks. Just make sure your overall portfolio is something you consider. In case you do lose some money this does not scare you from investing entirely. This also leads to the next point.
Look for what investments fit your strategy
There are so many ways to start investing nowadays. Especially when you are investing in your 20’s these different options can be interesting. Some examples of what you can invest in are stocks, houses, crowdfunding, and peer-to-peer lending. With all these opportunities, their different benefits, and risks it is important to figure out which of them fit your personal plan. Therefore, I suggest building your own financial plan.
#3 Build a financial plan
Whilst I am a firm advocate of investing in your 20’s (and in general), it is important to consider your personal situation first. Sometimes investing should have a lower priority due to your specific situation. For instance, if you have an outstanding high-interest debt your first priority should be to pay this off. As discussed before the average return of stocks is 8% yearly. So if you have debt with an interest the same or above this debt should definitely be your first priority.
A financial plan can help to set up strong fundamental money habits which can help you build the future you like. Therefore, the plan should not only be about investing but also be about debt (as discussed before), spending habits, and your overall money mentality. It will also help to build a stable investment strategy that will stay clear of short-term methods like trying to beat the market. Investing in your 20’s should not be a get quick rich method, it should be a long-term strategy. When setting up your financial plan be firm with yourself but make sure it becomes a realistic plan. To make a sound plan, take the following points into account:
Diversify your portfolio
Within an investment portfolio, there should be enough diversification to lower the risk of investing. What does this mean? Well, if we take stocks as an example, you could diversify your portfolio by making sure that your stocks are divided over different markets, geographical locations, or multiple sizes of companies. One way to do this is through index funds, which I will touch upon a little later.
Never let emotions drive your investments
A mistake that is made by some investors is to invest based on their emotions or feelings. This means selling when a stock goes bad and you feel anxious. Or buying a stock solely on the fact that it has done well in the past and it makes you feel safe. Completely stopping investing when the economy isn’t doing too well is also an example. Having a well-thought-out financial plan can prevent you from making these mistakes. Make sure you do your research and keep investing (or paying off debt) according to your own financial plan.
Using the power of index funds to your advantage
Index funds are really powerful due to the fact they are already (somewhat) diversified and will oftentimes be less risky than individual stocks. However, they still have a great return. On Macrotrends you can find the returns of the S&P 500 over the last decades. With an average of 8.87% yearly between 2000 and 2019 the index fund definitely did not perform badly. Therefore, in my opion index funds perfectly fit when you are investing in your 20’s.
Take advantage of other opportunities available to you
If you are located in America for example you can probably contribute to a 401k. If you’re lucky you will even get a 401k employer match. Always take advantage of these types of opportunities since it is basically free money you can access later on in life.
#4 Automate your investments
Once you have your financial plan in check, make sure to automate as much of it as possible. Oftentimes, we humans are not the best at remembering things (since there are so many fun things to do in this world). This means we are likely to forget to make a contribution to our investments at some point in time. Therefore, automating where possible is a great way to secure your own plan. Your investments will be able to take care of themselves when you have automated the process. This does not mean you should look at it at all. I even suggest you plan a periodical review of your investments and strategy to make sure you are still going in the right direction.
Automation also means you will pay yourself first, which is extremely important when wanting to achieve financial stability or independence. Paying yourself first means that you (automatically) contribute to your investments, and maybe some to your savings, after which you can only spend the amount that is left. A challenge I present myself is trying to live on less. By upping your automatic contributions a little bit over time you will have a bit money less to spend. Try the new amount for a couple of months and once you mastered it, try to take off a bit more.
Of course, there will be a point at which you don’t want to go lower anymore. This is completely up to you but I like the challenge. Doing this when you’re still in your 20’s will teach you great financial habits and prevent lifestyle inflation and consumerism.
#5 The power of compound interest
Compound interest is a serious power that is often missed by young investors. Compounding is the process in which an asset’s (like stocks) earnings (like interest or dividends) are reinvested which creates additional earnings over the course of time. So why is this so powerful? By using a compound interest calculator we can determine our wealth at a certain age. Let’s say we start with $0, add $300 per month so $3600 a year with an average interest rate of 8% annually.
If we start investing when we are 20 we will have saved a little over $ 1 million by the time we are 60 years old.
However, if we were to start investing at the age of 25 this will decrease to a total of $669,967 by the time we are 60.
If we start even later when we are 30 years old the total amount will have become $440,445 by the time you turn 60.
This is the reason compound interest is so extremely powerful. If you don’t take advantage of it you will miss out on financial growth that you won’t be able to get back. When investing in your 20’s I highly recommend filling in the compound interest calculator to motivate yourself to invest more.
#6 DON’T keep up with the Joneses
Last but certainly not least, please ignore the Joneses in your life. Material things oftentimes won’t make us happy, so why would we spend so much money on them. Figure out which things do truly hold value in your life and try to only spend money on these things.
One great way to do so is to never buy something immediately. Impulse buying is a really bad habit. Make a list of the things you truly think will make you happy or will improve your life. Then keep them on the list for at least a few weeks. Review them after a few days and see if they still hold their value. If not, delete them from your list. If they do you can continue to save for them or buy it after a few weeks.
One more important ground rule, if you’re not able to afford it with your own money don’t buy it! Nothing, except for a house and maybe college, is worth getting in debt for.
Well, those were some of the tips I try to implement in my own life. I hope they will help you too. Let me know what you think of these tips about investing in your 20’s on Twitter.
Disclaimer: I’m not a certified financial advisor, nor a certified financial analyst, an economist, a CPA nor an accountant of any kind. The information in this post is purely for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared is appropriate for you. Therefore, if there is any information you like please do your own research or consult a professional to make sure it works for you.