Younger people often focus mainly on the short term. This mindset makes it harder to build wealth and financial freedom later in life. You may not be thinking about home ownerships or having a family to care for now, but you most likely will in the future. Starting to save earlier means giving yourself a smaller financial burden when that time comes. You will also have the ability to retire on your terms.
1. Time
As a young investor, time is on your side. The money you invest now has more time to grow before you may need it. The longer you stay invested the better chance you have to benefit from compound interest.
When you invest money, you’re expecting to a get return on your money. If you leave that money alone (your original investment plus interest), compound interest applies to the total new amount of money you have. Compound interest is the one of the best reasons to start early with investing.
Below shows a comparison on why its important to start early. If you would like to calculate your own personal scenario try it here.
2. Risk Appetite
At a young age you can afford to take on more risks with your investments. Ideally, the money you plan to invest aggressively is money that you will not need for 20+ years. We all wish markets went straight up but in reality they don’t. The last 25 years we have seen three nasty bear markets. During that time, the market has had a total return of +900% (Source Ycharts).
Young people should take advantage of these periods of volatility because of their longer time horizon.
3. Minimal responsibilities
One of the great parts of being young is that it’s common for you to have minimal responsibilities compared to older individuals. As you get older you might have children, a mortgage, and/or family to care for. These are all expensive and time-consuming commitments. Building a solid financial base in your younger years will help avoid financial stress in the future.
It may be easier to enjoy your 20s with your full income at your disposal, but as you get older it will be harder to put away money each month.
4. Learn by doing
A great way to learn is by trying things on your own. There are a lot of smart and not so smart ways of investing. Buying meme stocks, options, penny stocks, or day trading are a quick way to lose money. Getting experience when the stakes are low, can be a valuable way for investors to educate themselves on the stock market.
Building financial discipline to save and invest early on will serve you well long term. Getting used to saving 10%, 15%, 20% of your income will help you reach financial independence earlier than the average individual. Develop the habit of setting aside money and making it work for you.
5. Flexibility
By saving money at a young age, you can begin to build your nest egg. This allows you flexibility should you run into any financial hardship. This could be from loss of employment or an unforeseen large expense. If you have a decent sized nest egg, you do not have to count on someone else or take on debt to cover the cost. Credit card debt is something you want to avoid at all costs.
Another perk is the ability to retire on your terms. If you save enough early on you will have a much better chance at retiring early. If you delay saving till later in your life, you will most likely be working well into yours 60s. Anyone who may need help getting started or making sure they’re on track, please contact us to schedule an appointment.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Disclaimers and Sources:
Compound Interest Calculator: Here
Market 900% return: Here
Bear market: A decline of 20% or more in the stock market
Nest Egg: A substantial sum or money or other assets that have been saved or invested for a specific purpose.
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investments in real estate may be subject to a higher degree of marker risk because of concentration in a specific industry, sector, or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.
