Don't Let Your Investments Take a Backseat in Your 20's
If there’s one thing, your 20’s is probably not dominated by, it would have to be your finances. Your 20’s are made up of school, making new friends and enjoying new experiences. Most university students are thinking about their part time job or new ways to procrastinate for that assignment that was due a week ago. As the old adage of YOLO goes – you only live once and that’s all the more important with investing because time lost now will never be regained. Most students stray away from investing because of a silly notion that “you should only invest when you have a lot money”. If you’re worried that your financial situation is not allowing you to invest, check out my previous article where I talk about ways to find ways to generate money to save.
The fact is, in your 20’s, your financial responsibilities are smaller: yes, we do have tuition, rent, living expenses and sometimes car payments. But those large expenses like mortgages, child care, and others are still a few years away. Investing with any amount is great and DOES NOT mean your money is locked away or lost forever. It just means your money is working to generate returns just like you work long hours at that job of yours to generate income. If you’re scared of losing money in risky investments don’t go there - you don't need to venture into products you don’t understand or are skeptical about– there are so many options available such as low risk mutual funds, etf’s and dividend stocks that are not volatile but can generate strong returns.
What’s the benefit of investing now compared to later?
I’m sure many of you have heard about compound interest which is the concept of earning interest on your initial principal you invested the first year and then in the second year earning interest on the previous year's total sum. The idea is simple if I have 1$ at 10% I earn 10 cents in interest = 1.10$. The following year I earn 10% on 1.10$ = 11 cents = 1.21$ after 2 years. The idea is simple the longer your investment is vested the more interest you make. The compound effect impact is significant given the # of years of compounding, that is why, the sooner (earlier) you start, the greater the compound effect.
Another great element of investing as a student is you establish a source of emergency funds. Building a portfolio from a young age enables you to have a safety net in the future (even if you never require it). If student loans are your concern when you graduate – always remember a great tactic to use is to invest now and use a portion of those funds to reduce your debt-load. In addition, the dividends, capital gains and interests generated from the portfolio will help accelerate debt repayment. This will free up more of your disposable income for other interests or to further pay down debt. Leaving money piling up in a cash account has its benefits (look at last week’s article) but not when its soaking up measly interest rates with no intended purpose in sight. If you lack financial knowledge there are many sites like my blog where financial knowledge is available and if you ever have any questions email me @ firstname.lastname@example.org.
I don’t know much about investing other than what kinds of accounts are there? What do you recommend?
Remember, when I say investing- I don’t necessarily mean diving head first into the stock market going hunting for the next Apple or Google. For some the market is just not the way to go. There are so many other options available like contributing to an RRSP – which generates a hefty deductible for your taxes. The government will actually deduct the amount you put into an RRSP from your income – so you’re taxed less. Even if you’re income is not high enough you can carry forward the deduction to be used later, however the higher the taxable income the greater the tax savings for your RRSP contribution since your marginal tax rate is higher due to our graduated tax rates.
As far as what I recommend – I am a firm believer of getting your feet wet first. For example, I started by moving 20$ weekly into a mutual fund account from my part time job into a index fund at my bank. Over time I saw my money grow at a much faster rate then the interest rate at the bank. I also looked to take advantage of my TFSA (tax free savings account-interest, dividends or capital gains are NOT taxed in TFSA accounts) which allows me to grow my money tax free. It also helps having investment goals to keep you going.
Less financial responsibilities mean investing in what you want and like rather than investing in what you need?
This is where the old expression of high risk high reward applies. When you’re young since we have less financial responsibilities then our parents it allows to invest in what we want and where we want. This is the time to try growth investments and take on a little more risk. As we age and our responsibilities grow we cannot be as risky with our funds. The losses we can absorb with age lessen as funds are at a premium. When you’re younger due to your earning potential it’s a better time to learn and take risks.
Why invest in general?
When people ask me why I should invest I respond with a simple line “If someone gave you the choice, would you rather have 12 eggs or 12 chickens”? The ideology is simple with 12 chickens I will always have eggs. In this case the chickens are your investments and the eggs are your capital gains and returns. It is only through investing you can grow your money and develop many additional streams of income besides working.
Disclaimer: All of the above information is my own personal opinion. All the figures above should be taken as examples for learning purposes only. Please consult with a financial representative before making any financial decision. Please do your research before making any decision.
Thumbnail Image: Source: paulfalconehr.com