Many emerging investors wonder what is the right time to start investing. The correct answer to that question is right now. It’s never too early or too late to start investing. By starting investing in your 20s, you gain a key advantage above others- time. Investors who start investing early will have more time to grow their wealth. However, many young adults put off investing until their financial situation becomes better. Despite popular belief, investing in your 20s and 30s is the perfect place to start investing, even with college debts and low salaries.
Most people start working in their early or mid-20s. At that time, the salary amount is not very high and we also have to manage our monthly expenses including food, commuting, rent, and more. Saving and investing is the last thing on the minds of a 20-something adult. However, there are several benefits of investing early.
For instance, investing in stock markets can be one of the best ways to grow your wealth in the long term. Whether you want to save for retirement, or college, or just require some extra funds, investing in your 20s can help you achieve your financial goals much faster
In this blog, we will highlight the benefits of investing early and why you should start investing in your 20s with some key strategies that individuals in their 20s can use to start their investment journey.
Top 10 Benefits to Start Investing in Your 20s
Longer Investment Tenure
Every individual has dreams like buying a home or a car that require large amounts of money. Let’s say you want to get married in the next 10 years and want to save up at least $100,000. You can invest in equity mutual funds, and while they don’t always promise guaranteed returns, the long-term returns on them are close to 12%.
By choosing the best options, you can make a fortune with long-term investments that will help you achieve your long-term goals. Moreover, if your investment tenure is longer, your investment amount can be smaller which won’t even burn a hole through your wallet.
Early Investments Improve Spending Habits
One of the best benefits of investing early is it improves your spending habits and teaches you budgeting and finance management. When you get into the habit of investing, you will have to save a fixed amount from your fixed salary. You will have to restrict your spending and create a monthly budget for your finances.
Having a budget is one of the best ways to improve your spending habits as it helps you track your expenses like rent, utilities, food, leisurely activities, etc. Making a budget and sticking to it is one of the best ways to track your expenses and achieve financial stability.
If you are struggling to save money, here’s a simple trick you can use. As soon as you get your salary, take out the amount you want to save first and then create a monthly budget from the amount that you have left.
Suppose you earn $3000/month and want to save at least $500 per month. Put away the $500 as soon as you receive your salary and start making a budget from the remaining $2500. If you are single and don’t have a family to support, you can comfortably get through the month with $2500.
Extra Time to Broaden Your Portfolio
Another great benefit of starting to invest in your 20s is that you get a lot of extra time to diversify your portfolio. When you are young, you can make small investments and also take risks. You can explore and experiment with different asset classes which will help you diversify your portfolio and also spread out your risk quotient. Hence, increasing your portfolio’s chances of success.
This is one of the best methods to ensure financial opportunities reveal themselves to you that are profitable in the long term. If you invest enough time and energy into diversifying your portfolio, you can potentially grow your wealth a lot faster. For young adults in their 20s, investing in mutual funds is an ideal way to ensure financial stability with guaranteed results.
Take Advantage of Tax Advantages
Investing in particular tax-free products can help investors increase their net returns while simultaneously lowering their overall taxable income. There are plenty of tax-exempted investment options in the United States of America that you include in your portfolio to save taxes.
For example- municipal bonds, tax-exempt mutual funds, Tax-Exempted Exchange Traded Funds(ETFs), Roth IRAs, and Health Savings Accounts are some of the most common options you can invest in. This means that the amount invested in these particular assets can be shown as a reduced taxable income and can also help individuals save their hard-earned money while also achieving their financial goals.
One of the best benefits of investing in your 20s is that you have the unparalleled advantage of high-risk tolerance. This means that you can make aggressive investments that have the potential for huge returns but come with a risk factor. Investing in the stock market can be a great starting place for you as it has the potential for huge gains.
Risk is an essential part of investing and all investments carry a certain amount of risk, which is why each investment should be done with utmost caution. Just because you can tolerate risk doesn’t mean you have to take unnecessary ones. Being aware of the risks and understanding the ins and outs of the stock market is essential for any investor who is looking to expand their portfolio while achieving financial stability.
Also, keep in mind that taking too much risk without proper knowledge can result in financial loss.
Taking Advantage of Market Cycles
When you enter the stock market space in your 20s, everything seems new and it can be intimidating for a young person. Understanding the market cycle would help you understand the stock market and make better and more informed decisions moving forward. The market is divided into 4 stages-
- Accumulation Phase
- Mark-up Phase
- Distribution Phase
- Mark-down Phase
The Accumulation phase is when the market recovers from the worst and the early adopters and insiders of the company start to invest again.
In the Mark-up Phase, the buyers move up and the market is overcrowded with people who are looking to invest. Selles generally cash in on the markup phase.
The Distribution phase is also referred to as the golden phase for the sellers. If you are holding a particular stock for a very long time, you can either sell it for a very high price or wait for the next market cycle(which may provide an even higher price). In this phase, the price of stock is stable and the number of sellers is on the lower end.
The last and final phase is the Mark-down phase where the market plummets and the prices of stocks drop significantly. The new investors and early adopters start to buy again hoping the price drop is temporary.
Potential for Higher Returns
Investing in your 20s has the potential for larger returns as you have more time to grow your investment. Moreover, stocks are one of the best investment options as they generally offer higher returns than other options like Mutual Funds, Fixed Deposits, or Savings Accounts. This is because stock prices are not stable and can fluctuate greatly, providing investors an opportunity to take advantage of the price movements and get higher returns.
Moreover, investing at a young age can allow you to take advantage of compounding and potentially larger returns over a long period of time. The earlier you start investing the more time you have for your investment to grow and accumulate value.
While stock prices fluctuate and are not sable, a diversified portfolio can minimize the risk factor increasing the likelihood of achieving your financial goals by harnessing the potential of your investments.
Time to Recover From Losses
As mentioned above, each and every investment carries a certain amount of risk. Moreover, investing in volatile markets can be hard to navigate and incredibly intimidating for a beginner. However, investing in your 20s allows young investors to make mistakes, learn from them, and recover their losses.
By investing at a younger age, you gain years of experience in volatile markets that teach you invaluable lessons that can be applied to later investments in your life. Also, investments that have longer growth periods have more time to become profitable. This is true for individuals who are patient and don’t choose short-term investments as compound interest has more time to accumulate and provide larger returns.
Financially Stable Retirement
When you start investing in your 20s and compile a diversified portfolio, it gives you the unrestricted freedom to choose how you want to spend your retirement years. You can choose to live a comfortable life without any income, just by using the returns from stock market investments to fulfil your needs and desires. Moreover, if you have some extra cash lying around, you can always reinvest it as you now have knowledge of the stock market from years of investing experience.
One of the benefits of early investments is that it allows you to build up a nest egg of financial stability upon reaching retirement. Investing in stocks, ETFs, and mutual funds that meet your financial goals is a great way to save for your future while still enjoying your twenties.
Moreover, investing in the stock market also offers one of the best returns when compared to other options. It gives the investors more purchasing power with each dollar saved.
Human Capital can be referred to as the future value of all present wages. Since the ability to earn an income is essential for saving and ultimately investing, by investing in yourself, earning a degree and learning advanced skills you essentially invest in yourself with a potential for higher returns.
Young adults in their 20s often have many opportunities to learn new skills and increase their ability to earn higher future wages. Taking advantage of these opportunities is also considered a form of investing and can help you later in your life.
How to Start Investing in Your 20s?
By now you must have understood the various benefits of investing early on in your life. However, many young adults are still unsure about how to start their investing journey. These key strategies can help you build a solid foundation and ensure financial stability in the long run.
Learn the Basics of Personal Finance
Personal Finance is one of the best subjects for young adults to learn. Since you can’t learn about finance in your basic high school, it is up to individual investors to put in the time and effort to acquire basic knowledge and skills about finance. The more one learns about finance, the more better they will get in investing. While it is a broad subject and there is a lot to learn about financing and investing, individuals who are about to start investing in their 20s should focus on 5 key areas of personal finance-
- Investment Products
- Financial Metrics
Set Financial Goals
Many young adults in their 20s dream such as becoming a millionaire by 30 or retiring by 45. While these financial goals are quite far-fetched if you play your cards right in investment, they are not completely unachievable. The first step to achieving these goals is to formulate a financial plan-
- Setting up an emergency fund
- Having a wealth goal such as saving $500,000 by the time you are 30.
- A retirement savings plan
Beyond these plans, it is also essential to include things like owning a property, children’s education expenses, etc. After identifying your financial goals, it is also important to create a foolproof plan to reach these goals. Make sure to consider the 3 most important aspects-
- Investment Tenure
- Investment Amount
- Investment Product
Save First, Spend Later
When you start investing in your 20s, your low salary can make it difficult to save a substantial amount at first. Young adults are also often bad at managing expenses and tend to overspend a lot, leaving no room for savings. After all, savings is the amount left after all your expenses have been taken care of.
One surefire way to ensure saving a substantial amount is to focus on saving first and spending later. As soon as you get your paycheck, set apart a specific sum of money for your savings, and create a budget with the leftover amount. Even if you manage to save a small sum per month, it will ensure that you get close to your financial goals in the long run.
Automate Your Investments
Automating your investments will simplify the investing process and ensure that you invest a specific amount every month. One of the best ways to automate investments is to set up a Systematic Investment Plan(SIP) in a mutual fund. SIPs allow investors to invest a specific amount of money each month and purchase units of a mutual fund. Even a small monthly SIP can help young adults who have just started investing to generate substantial savings amount over time.
The 20s are an ideal time to start investing in different asset classes. By implementing the simple strategies mentioned in this blog, you can start your investing journey and build up a substantial nest egg by the time you retire. Moreover, many investments such as dividend stocks can provide a stable income throughout your life that can help you live comfortably after retirement. Starting to invest in your 20s provides you with a plethora of benefits such as the ability to take increased risk, opportunities to increase your future wages, and best of all, TIME.
Even if you start small at an early age, it will give you longer growth periods meaning you have more time for your investments to become profitable. So, start investing today and ensure a brighter, financially stable future for your older self.
Frequently Asked Questions(FAQs)
Ans. There are various advantages to starting to invest in your 20s and 30s. As young adults have distinct benefits over those who begin investing late such as time, the ability to take increased risks, and opportunities to increase future wages. Even if you start to invest a small amount, it will still allow you to save a lot of money for you to comfortably retire.
Starting to invest in your 20s comes with a plethora of benefits including-
1. Potential for long-term returns
2. High Risk Tolerance
3. More time to recover from losses
4. Financially Stable Retirement
5. Extra time to broaden your portfolio
While there are various benefits of starting to invest early, young adults in their 20s should also understand the basic principles of finance. Firstly, it is important to learn the basics of personal finance like budgeting, saving, investment products, financial metrics, and taxes.
Moreover, it is also important to set financial goals and formulate foolproof plans to achieve them. Lastly, young adults should learn to prioritize saving and cut down on spending.