Investing is an excellent way to build wealth and plan for your financial goals, particularly if you start when you're young. It’s the primary method for saving for retirement, and it can help you reach many other financial milestones along the way.
Young people have a considerable advantage when it comes to investing because you have the potential to grow significantly more wealth if you start early. You can take advantage of technological innovations, take on slightly more risk, and take advantage of some other benefits of investing young.
- Investing when you're young gives your money more time to compound as you reinvest your earnings.
- You can take on more risk with your investments when you're young because you have more time to recover if things go wrong.
- Your generation's tech skills might come in handy.
- You have numerous options to choose from to get started, from ETFs to mutual funds or commodities.
The Impact of Compounding
Perhaps the most significant benefit of investing when you're young is the impact that compounding will have on your portfolio. Compounding occurs when you reinvest your earnings, and those earnings begin to work for you. They earn you more money. This allows you to invest less each month from an early age to end up with the same amount during retirement, if not more.
Let’s say your goal is to have $1 million by the time you retire at the age of 65. You earn an annual stock market return of 10%. You would only have to contribute about $190 a month to an investment account if you start at age 25 to reach your goal of $1 million by age 65.
You’d have to contribute over $500 per month if you wait until age 35 to begin investing. And you’d have to invest nearly $1,500 per month to reach your goal if you wait until age 45.
Learn Lessons Early
No one is an expert when they’re a beginner investor, no matter their age. There's bound to be a bit of a learning curve whether you start in your 20s or your 50s. But you often have the opportunity to make mistakes and get them out of the way while you’re young and often have less responsibility.
Making a costly mistake with your portfolio at age 50 could seriously set you back on your retirement journey or another financial goal, such as paying for your child’s college education. But you'll have plenty of time to recover your losses if you invest young. You’ll have learned your lesson, and you'll have more time to bounce back.
Use Your Tech-Savvy Skills
Robo-advisors only date back to 2008, but the industry is expected to reach a value of $1.5 trillion by 2023, according to data from InsideBitcoin, a cryptocurrency-focused education and news portal. A specific group of individuals leads the interest in robo-advisors: millennials. They outnumber both Baby Boomers and Generation X combined when it comes to the use of robo-advisors, according to a Charles Schwab survey.
Users report that these digital investing tools have helped them take the emotion out of investing, giving them more time to focus on their families. They've also given them better peace of mind about their finances. Older investors are beginning to take notice of robo-advisors in larger numbers. Nearly half of Boomers reported that they plan to use a robo-advisor by 2025.
Americans still value person-to-person service. More than 70% of people want a robo-advisor that includes human advice, and 45% would be more inclined to use one if human support was easily accessible, according to Charles Schwab.
Younger investors may also be more aware of tech-driven companies than their older counterparts. They tend to be more tech savvy than older generations. They may be better at navigating trading apps or relying on technology for managing their investments. And tech-driven companies can make for some smart investments if they continue to innovate and grow.
Longer Timelines Allow for More Risk
Your time horizon is the expected amount of time you have left before you plan to use the money you’re investing. Your time horizon is 40 years if you’re 25 and you plan to retire at 65.
Young adults with a longer time horizon have the opportunity to take on more risk because they likely won’t need the money for many years to come, according to the Securities and Exchange Commission (SEC). Look at the 2008 recession as an example. The Dow Jones Industrial Average fell by more than 50% over the span of 1.5 years before it began to steadily increase again. It wasn’t until the first quarter of 2013 that the market reached pre-recession levels.
The portfolios of those who were preparing to retire when the recession hit were significantly impacted. These investors may very well have had to postpone retirement if all their retirement savings were in the stock market. But younger investors were less impacted. The Dow grew to more than double what it was before the recession by April 2021. Younger investors have seen their portfolios bounce back spectacularly.
You can afford to take on some higher-risk investments if you start investing when you're young. Whether it be cryptocurrency, private equity, or another higher-risk investment, younger investors have time to explore their options without completely hurting their chances of retiring comfortably.
Another benefit of starting to invest when you're young is that you can still see a return even if you invest when the market is at an all-time high. The stock market has recovered from every market correction and recession throughout history. It has consistently trended upward over time. The market is likely to continue to increase if history is any indication. Today’s all-time highs will be overshadowed by new all-time highs in the future.
How To Start Investing When You're Young
Investing means putting your money into financial products and hoping for a return. It tends to have a greater return than saving, but investments generally aren’t federally insured as savings accounts are. Common investment products include:
Most people get their foot in the investing door through an employer-sponsored retirement account such as a 401(k) or 403(b). Many refer to planning for retirement with the word “saving,” but you’re actually investing when you put funds into a retirement-focused account.
You can also invest for retirement on your own through an individual retirement account (IRA) rather than an employer-sponsored plan.
Retirement accounts are tax advantaged. Either your contributions are tax deductible or you can withdraw your earnings tax free during retirement, depending on the type of account you choose.
Many people also invest through taxable brokerage accounts, which can be used to purchase a variety of assets. These investments are made with after-tax dollars so you'll end up paying taxes on your earnings. New and experienced investors alike have a few options to consider:
- You can work with an investment professional who will recommend certain investments based on your financial goals.
- You can choose your own investments using an online brokerage account, many of which offer investment apps for your phone.
- You can use a robo-advisor, a digital tool that automatically chooses investments based on your predetermined financial goals.
Precautions Are Still Important
Investing when you're young gives you the unique benefit of a long-time horizon. You can afford to take on more risk, and your money has more time to compound. But that doesn’t mean it’s safe to throw caution to the wind. Every type of investment carries some level of risk. And while higher-risk investments may have greater potential for high returns, they also increase your chances of losing your money entirely.
Consider the long term when you're investing in your 20s. Holding a bad investment for a long time won’t turn it into a good one. You’ll only experience the benefits of compounding if your investments perform well. Look at the performance history of an investment before deciding if it’s right for your portfolio.
One of the best ways to invest with caution is to diversify your portfolio. If you choose to take on higher-risk investments such as Bitcoin or the latest meme stock, you can reduce your chance of loss by keeping the majority of your portfolio in tried-and-true, long-term investments that have historically performed well.
Frequently Asked Questions (FAQs)
What steps should I take before I begin investing?
The SEC recommends tidying up your financial house and paying off your high-interest debts first. Make a list of your goals along with the timeframes for when you hope to achieve them. Do your homework. Learn as much as possible about the different types of investments that are out there, and consider talking with a professional to ensure that you fully understand all their implications.
What are some riskier investments when you're young?
Stocks are among the riskier investments available, but you'll have more time to bounce back if you start investing young, well before you've targeted your need for the money. Stocks have historically provided the highest average rate of return.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.