How Teens and 20-Somethings Can Start Investing

Most potent yet unappreciated tools for personal finance is it’s time. If you’re looking to build long-term wealth, the earlier you start investing, James Rothschild the greater chances of achieving financial success. While it’s tempting to delay investing in the event that you’re not able to pay off debt and earned a greater income or “know much more” you should know that starting early–even with small amounts–can make a dramatic difference because of the power of compounding. In this article, we’ll discuss how investing early helps build wealth over time using actual examples, data and actionable strategies to enable you to start investing today.

It is the principle of Compounding

The fundamental concept of early investment is a straightforward but powerful mathematical concept: compound interest. Compounding means your investments not only produce returns, but they also begin with the ability to earn themselves. In time this snowball effect could transform modest investment into significant wealth.

Let’s illustrate this using a simple example:

Imagine investing $200 a month from age 25 in a bank account that pays an annual yield of 8percent.

When you reach the age of 65, your investment would grow to over $622,000 while your total contribution would be only $96,000.

Imagine waiting until you turned 35 before beginning investing the same $200 each month.

At 65, the value of your investment would rise to just $274,000–less than half what would have been earned 10 years earlier.

Takeaway: Time multiplies money. The earlier you begin your compounding, the more effective it can be.

Time in the Market vs. Timing the Market

Many people worry over “timing to the market”–trying to buy low and then sell it high. Studies consistently show that the time you spend within the marketplace is far more important than an exact timing. Beginning early means you have more years in the market, allowing your investments to be able to weather volatility in the short term and benefit from long-term growth trends.

Take this into consideration: even if you make your investment right before any downturn, the early beginning gives you the advantage of time for recovery and growth. Delaying because of fear of market conditions will put you further back.

Dollar-Cost Averaging: A Beginner’s best friend
If you commit to investing a set amount of money in regular intervals, regardless of market conditions, you’re employing one of the strategies known as the dollar cost averaging (DCA). This reduces the risk of investing a large sum in the wrong spot and develops a habit for consistent investing.

Early investors can benefit of DCA by putting aside small sums every month, such as from one’s monthly paycheck. Over decades, those small contribution amounts can be significant.

The Opportunity Cost of Waiting
Each year that you put off investing and investing, you’re not only missing out on the money that you could have invested. You’re missing out on the compounding effects of that money.

For example, investing $5,000 at the age 20 at a rate of 8% annual return turns into more than $117,000 when you turn 65.

In the event that you delay until 30 to invest that $5,000, it increases to only $54,000 by age 65.

A delay of 10+ years can cost you more than $60,000.

This is why early investing is not an easy decision, it’s frequently the most important decision for building wealth.

The younger you invest, the more (Calculated) Risikens

When you’re young, you can take longer to recover from market downturns. This means you can take on more risky investments like stocks, that offer better potential returns over the long haul compared with savings accounts or bonds.

As you age and move closer to retirement, it’s possible to gradually shift your portfolio to safer investments. But the first years are your opportunity to increase your wealth with riskier high-reward strategies.

Being early gives you financial flexibility. It is possible to make a mistake or two then learn from it yet still win.

The Psychological Benefits of Beginning Early
The early start builds more than just financial capital, it builds trust and respect.

Once you have a habit of investing during the 20s and 30s, you will:

Learn about the volatility and ups from the marketplace.

Learn to be more financially educated.

You can relax by watching your wealth grow.

You can avoid the dread of trying to catch up later in life.

Also, you can free up your time to enjoy your life rather than rushing to save.

Real-Life Example: Sarah vs. Mike
Let’s review two fictional investors to emphasize the idea.

Sarah begins investing $300 per month at the age of 22, and ends it at 32, which is only 10 years of investment. She never invests another penny.

Mike sits till he turns 32 before investing $300 per month until age 65. Then he’s invested for 33 years.

At 8% average return:

Sarah’s investment: $36,000 increases to $579,000 at age 65.

Mike’s investment: $118,800 increases to $533,000 by age 65.

Sarah was able to contribute only a third the amount, however she resulted in more money simply by starting earlier.

How to Get Investing Earlier: Step-by-Step

If you’re convinced it’s time to get started, read this beginner’s guide to getting started with early investing:

1. Start with a Budget
Find out how much money you can comfortably spend each month. A minimum of $50-$100 can be a good starting point.

2. Set Financial Goals
Are you planning to invest for retirement? A house? Financial freedom? Set goals that are clear will guide your strategy.

3. Open an Investment Account
Begin by opening your IRA, Roth IRA, or a brokerage account that is tax-deductible. Many platforms have no minimums or fees and provide automated investment.

4. Choose Low-Cost Index Funds or ETFs
Instead of choosing individual stocks choose diversified funds that are a reflection of the market. They’re free of charge and provide solid long-term returns.

5. Automate Your Investments
Create monthly recurring contributions to ensure you’re consistent. Automating reduces the temptation to try to time the market, or even skip investing.

6. Avoid paying high fees
Choose accounts and funds with low ratios of expenses. A high fee can impact your return significantly over time.

7. Stay on the Course
The investment game is long. Don’t be distracted by market news and focus on your long-term objectives.

Common Excuses: Why they’re costly

Here are some reasons that people put off investing and how they could cost you money:

“I’ll begin when I make more money.”
Even small amounts compound over time. Waiting just means less time for growth.

“I have an outstanding debt.”
If the rate of interest on your debt is less than your expected return from investments it is usually a good idea to both pay off the debt and also invest.

“I do not have enough.”
There is no need for a degree to become an expert. Start with index funds, and learn as you progress.

“The market’s too risky.”
The longer your investment horizon is, the more time you’ll have to be prepared for the ups and downs.

The Long-Term View The Long-Term View: Generational Wealth

A good investment strategy doesn’t only benefit the individual. It could also have a ripple effect on your family’s future generations.

Establishing a solid financial foundation earlier gives you the chance to:

Buy a home.

Spend money on your children’s education.

Retire comfortably.

Leave a financial legacy.

The earlier you begin making your initial steps, the more money you’re able donate and the more financially-free you will be.

Final Thoughts

A good start is the closest to a superpower financial that many people have access. You don’t need a six-figure income or a degree in finance, or an optimum timing to achieve wealth. It’s all you need is patience perseverance, discipline, and consistency.

Beginning early, even if it’s with low amounts, you’re giving your cash the time needed for it to develop into something powerful. The most costly mistake isn’t selecting the wrong fund or losing out on a promising stock; it’s being too slow to begin.

So start today. Your future self will thank you for it.