You would end up with more than four times the amount of money by starting early! That’s the power of compound interest and investing young. And what’s even better? As you advance in your career and earn more money, you’ll have even more to invest down the road.
Financial professionals recommend putting 10-15% of your income towards retirement. That may seem like a lot of money now, but it will become an easier goal to reach as you advance in your career.
2. Resiliency and risk tolerance
Investments have ups and downs, and financial professionals tell us that, with the right portfolio mix, the best way to survive a volatile market is to ride it out. Economic conditions have a way of smoothing themselves out over time. This means that age is an important factor to consider when weighing risks in investing.
Younger people can take on more aggressive investments with generally higher rates of return because they have more time to ride out rough patches in the markets before they reach the age of retirement. Higher risks equal higher rewards—if you’ve got enough time for your portfolio to work through the economy’s ups and downs.
Life changes fast—often faster than you expect. There are countless stories of people reaching middle age and suddenly realizing they’ve done almost nothing to save for their future. Not a great feeling.
By investing when you’re young, you’ll have greater command over what your future looks like. It gives you options. Having a lot of money doesn’t mean you have to stop working, but wouldn’t you rather be able to make the choice yourself? There are many people that don’t have any option but to keep working because don’t have enough saved for retirement.
How to start investing when you’re young
Mike Klopfer, a Certified Financial Planner for Global Retirement and Investment Services with more than 15 years of experience, has some smart advice for young investors.
“I know young people are getting pretty tired of hearing others tell them to cut out their morning coffee in order to start saving. I’m a firm believer that you don’t have to make yourself miserable to plan for your future.
One of the easiest things you can do is to take advantage of an employer-matched 401(k) if your job offers one. Let’s say you make $30,000 a year and contribute 1% of your income—around $300 a year. You probably won’t even notice it’s gone from your paycheck, and you’ve already started saving.
If you don’t have a 401(k) option, or you’re worried about what life might throw you—like if your car has been making strange noises lately—I get it. I’ve been there too. If you’re hesitant to lock up your money, try setting up your banking app to make an automatic $20 transfer from checking to savings every two weeks. This way, the money is still accessible if there’s an emergency. And if you don’t need it, by the end of the year you’ve got $500 to work with, either as an emergency fund or to invest in something like an IRA.”
What should you invest in when you’re young?
When you’re just starting out, you have several good investment options.
- 401(k)s, especially if they are employer matched—don’t pass up on free money!
- Roth IRAs are often recommended for younger investors because they’re taxed on contribution, not when you withdraw for retirement. That saves money because you’ll likely be in a higher tax bracket when you retire.
- Certificate and Money Market accounts are all good options that offer a higher rate of return than a standard savings account. A money market account is a good choice for your emergency savings because you can still access the funds if needed.
- Home buying is a big step in life, but if you can afford to buy and you’re going to live in the home for more than 5 years, it may be a better option than renting because you’ll start to build equity.