The trouble with investing in your 20s is that you are experiencing so much change in a rather compressed amount of time. You are starting your career, getting married, having kids, etc.
Despite the difficulty, your 20s are a crucial stage when you probably have more control over your cash flow than you will later (when kids and college plans kick in). Let’s take a look at four practical steps you can take now to set yourself up for decades to come.
Step 1: Leverage the years
You’ve heard it before, but listen up now: When you’re in your 20s, time is truly your ally. The power of compounding can help your cash grow in a way that it never will again, because right now you’ve got decades on your side.
Consider this: If you start saving just $1,200 a year, a mere $100 per month, starting at age 25, by age 65 you’ll have about $185,700 (assuming a 6% return). But say you delay by 10 years, and start saving $1,200 a year from ages 35 through 65, earning the same 6% return. You’ll end up with only $94,800, nearly 50% less.
Step 2: Save time
Automate. Automate. Automate. I strongly recommending automating as much of your savings plan as possible. This will set you up for the greatest chance of success and meeting your goals. Similar to how your 401k savings are automated, automate the rest of your savings goals. After a few months of automation under your belt, you will probably adapt and learn to live off the remainder, without even realizing that you are meeting your savings goals at the same time.
Also, if you do not feel comfortable picking investments, don’t use it as an excuse to postpone investing, Assuming you have a 401k, save time and put your money into an index fund that mirrors the stock market (like an S&P 500 index fund). Or if index funds aren’t available in your 401k, use a low-cost target date fund (keep the expense ratio at 0.5% or lower).
Step 3: Save more
It might seem like a sacrifice to save 20% of your income right now. But think about it this way: By saving as much as you can while there are fewer demands on your income (compared to your 40s or 50s, when you may have kids in college, say) you put yourself ahead.
One no-brainer way to save more is to sign up for auto-increases in your 401k, so that every year you’re automatically raising your contribution rate.
Step 4: Be aggressive
This was an interesting stat I read: among 20-something investors, two in 10 have their money in a money market or stable value fund. While putting your money into stock does entail more risk, it also provides you with more growth at a time of life when you need the growth and can probably handle the risk. By being more conservative, you risk losing out on market gains keeping up with inflation.
Now that you’ve got the steps down, contact Verisail for a free consultation.