20-something and too young to invest? Think again!
Written by Jamie Bubb-Sacklyn on July 12, 2018.
I know this is probably not what you want to hear while you’re having the time of your life in your twenties - but now really is the time to start saving so you can have a retirement that is fabulous rather than frugal. You have only just started your career, so ending it probably feels light years away but if you want to maintain a certain lifestyle once you stop working (and who doesn’t!?) you can get a massive head start if you start saving now.
Here are my six top tips for twenty-somethings who want to get ahead of the game and spend their golden years living it up in style!
1. Harness the power of compound interest
You probably understand that compound interest is interest on interest, but did you know that its power is so incredible that Albert Einstein called it the ‘eighth wonder of the world’? The key to compound interest is that it needs time to work its magic, which is why you need to start saving early. Not convinced? These scenarios may change your mind:
Imagine you start saving $300 every month when you are 20 and carry on doing so until you are 60. With a return of 8% per year that gives you a rather tidy pot of $1million to fund your retirement.
But let’s say you hold off saving until you are 30. In this scenario your $300 a month earning the same rate of interest will give you $440,445.
The difference in the amount you save in the two scenarios is just $36,000 but putting off saving for that key decade diminishes your retirement savings by over half a million dollars!
Time is finite so even though you have decades before you retire, now is the time to make the most of the power of compound interest.
2. Save more as you get older
Early in your career, I’m guessing that your finances are being pulled in a number of directions. You may have student loans to pay off, be saving up for a house, or you could be making the most of your responsibility-free years to travel the world. Maybe you don’t have $300 a month to save but the important thing is to save what you can. Start with just 1% of your salary if you need to and gradually increase the amount as you get older. Hopefully your career is going places and your income will be rising year on year so you probably won’t even notice if you increase the amount you save by 1% per annum. If you can be saving 20% of your income by the time you reach 40 I’d say you should be on track for a pretty good retirement.
3. Take a holistic approach to your finances
If you can start investing and building wealth early, then great, but it also needs to be part of a broader financial plan. Good financial health starts with basic habits such as paying off debts, resisting the temptation to buy on credit, living within your means and learning to budget. Look at the bigger picture and work out a sound financial path rather than being seduced by the promise of making a quick buck on the latest hot stocks.
4. Make money your servant not your master
Money is a tool and it needs to be managed, but many people find it becomes their master. Make your money work for you in creating the lifestyle that you desire by being a thoughtful consumer and making considered choices regarding what you spend, save and invest. Setting good financial habits now is the key to your future financial security. Right now, while you are working you trade time for money but if you are clever with it, your money will repay you down the line giving you time to do the things that matter to you.
In terms of investment, a balanced portfolio taking into account your risk profile is what you should be looking to achieve. With youth on your side you can afford to take some risks when investing for the long term as you have time to recoup any dips in the market. As you get older, you might want to reign it in on the risk and opt for more conservative investments as you approach a time when you’ll begin to need them. The same approach to risk goes for investments towards shorter term goals such as saving for a deposit on a house.
5. Say no to keeping up with the Kardashians
...or anyone else for that matter. Comparison really is the thief of joy and FOMO-led spending can get you into financial hot water. We have all felt jealous of Instagram and Facebook pics of our friends’ shiny new sports car, exotic holidays or Michelin-starred dining experiences but who knows the truth behind them? It could be that these seemingly lavish lifestyles are funded by crippling credit card debt and provoke untenable levels of stress, something you won’t be seeing on social media.
Decide what is important to you, base your financial goals on that and stick to the path you choose, no matter what everyone else is doing. When you are retired and living the high life on your million dollar savings, those same friends may be forced to choose between eating and heating if they have sacrificed long term security for short term highs.
6. Automate your investments
You will have realised by now that I strongly believe that saving should be a priority for twenty-somethings. The most painless way to make it happen is to decide on a monthly amount that you can afford to save and transfer it straight out of your current account as soon as you get paid. That way you won’t be tempted to spend it. You will be surprised at how quickly it becomes absorbed into your regular outgoings and you don’t even notice it is gone. Then make sure you are clever with your savings and look beyond bank deposits to investments that are going to give you a better return.
A financial adviser can help with that and recommend investments that are suited to your age and risk profile. If you don’t have an adviser and you want to get your finances sorted for life, why not get in touch with me at firstname.lastname@example.org and we can work out a plan together?