When you are in your 20s, you live in a crucial stage of life as you have the advantage of being more in control of your finances than later on in life. When college plans and children kick in, it becomes difficult to have complete control of your cash flow. The 20s present you with a great time to build wealth due to the time factor that is your strong point. This is the stage in life where you have the opportunity to invest in an aggressive manner and take higher risks in order to maximize your returns. Here is a look at the advantage as well as a strategy of investing in your 20s.
The problem with investing in your 20s is not the fact that you are focused on doing other things such as starting rock bands and what are views. The decade that follows after you graduate presents the most incredibly productive time in your life. You might be launching your new business, career or family. Most people in their 20s have already planned how they will be saving for their future. This was according to a study conducted by Fidelity in 2012 where on average every IRA owner between the ages of 20-29 was established to have around $5,800 in savings. Below are some strategies that you can use to maximize these golden years for a brighter future:
Step 1: Leveraging these Years
When you are still in your 20s, time is really on your side and the compounding power at this time will see your cash grow in an unexpected way. This is possible due to the many years ahead of you. If you were to save about $100 monthly, for instance, you will manage to save $1,200 annually. If you were to start saving this mount at the age of 25, by the time you hit 65 years, you will have around $185,700 if the percentage return is 6%. If you were to delay the saving habit by say 10 years, you will end up with a lesser amount (about $94,800, which is about half the amount if you had started at 25 years of age).
Step 2: Saving Time
Although you might have a lot going on in your life, you should not use your inexperience in investing as an excuse. There are so many options available like an index fund that is almost similar to the stock market e.g. an S&P 500 index fund. If these are not available, you may turn your attention to cost-effective target date fund. However, ensure that you maintain the expense ratio at strictly 0.5% or lower. You can also try out a low-cost TDF to get you started on your investment journey. You can also open a conventional IRA or Roth and if you are self-employed, you can open a SEP-IRA. The key thing to do is to open a retirement or investment account and ensure that you transfer money into it regularly. You can affect the transfer automatically from your salary to ensure that you never forget to save.
Step 3: Saving More
It might seem like a tall order to sacrifice about 20% of your salary for savings t the moment. However, when you consider that this is the time that you have fewer demands, you will find out that it is for the best. You will be able to propel yourself ahead before other responsibilities come about. In case of any vicissitudes of life, you will have no problem saving a little amount of money. Signing up for 401k and saving more will ensure that your contribution rate goes higher.
Step 4: Being Aggressive
About two in every 10 investors in their 20s have put their money in a stable value or money market fund. There are little chances that such money will be able to survive inflation, making them more like storing money in your freezer. Putting your money in equities carries more risk but offers growth, which you need at this age when you can handle the risks involved. Becoming too conservative jeopardizes your savings as well as miss out on various market gains. According to Brooks Herman, BrightScope’s head of research and data, a high number of young people in this age bracket put all their money in cash. Brooks holds that this move will not help your retirement account in the long term.