Investing in Your 20s: Why and How to Get Started
Updated on July 3, 2021 by Amber & The Team
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The road to financial freedom is never straightforward. If that were the case, we would all be swimming in money! What’s clear though is that many young people find the process of growing their wealth confusing and overwhelming — and this is totally normal. Twenty-somethings don’t have the benefit of experience on their side, nor the resources that well-established individuals have. But ask any successful person, and they would tell you that the secret to their wealth is no secret at all: It’s all about investing.
In this article, we’re explaining why and when investing in your twenties can be useful, and how to get started if you decide to try.
Investing in Your 20s: Why and How to Get Started
1. Why investing early is key
Investing is often seen as a rich man’s game, but it’s really not. Anyone can and should invest if they want to achieve long-term financial stability. But when asked, 45% of millennials say they can’t afford it, so they choose not to make any investments. However, the majority know that it’s best to invest before they enter their 30s.
Having a lot of capital to work with is certainly ideal, but it’s not necessary. Younger people actually have more to gain than older investors. That’s because time is on your side, and it will help you earn higher returns because of compound interest. Sure, you can choose to stash your funds in a regular savings account, but that money remains stagnant. With an investment portfolio, your money grows over time, sometimes even exponentially, depending on your strategy.
2. What about debt?
Another reason people put off investing for later — or sometimes avoid it altogether — is debt. We all have some form of debt, whether it be student loans, car loans, mortgages, or credit card debt. If you have to choose between the two, it makes sense to pay off debt first, right?
According to experts, it depends on the type of debt you have. You can decide by evaluating the interest rates of your loans and investment opportunities. This is signified by the annual percentage rate (APR) or the rate at which the interest grows. Interest on loans is bad because you have to pay it, but interest on investments is good because it’s money you earn.
If the APR for a loan is bigger than the APR of your investment, then definitely pay off that debt first. That’s because you will end up paying more in that time than you will be collecting returns. But if the case is reversed, meaning your investment earns a bigger interest than your loan, investing first can be a good idea.
3. I have a little bit of capital — what should I invest in?
Today, there are dozens of investment opportunities available that can help you accumulate wealth. Here are three to consider:
1. Retirement plan
If you can only choose to invest in one thing, it should be your future! Retirement plans, like your 401(k) or IRA, are not technically investments, but they do come with options to do that.
For instance, you can use your IRA to invest in different assets like stocks, bonds, and mutual funds. There are certain limitations, like how much you can invest or when you can liquidate your assets. However, opening a retirement plan is something you should do as soon as you’re earning an income anyway. Being able to invest through it is just a bonus!
The stock market, while intimidating, can be one of the most profitable places to invest your funds in. A common strategy is to buy and hold stocks long-term if you want to take a more passive approach. However, you can also be an active trader by buying and selling company shares like Apple or Amazon.
But if you don’t want to purchase stocks directly, you can opt to invest in stock CFDs. With CFD trading for stocks, you don’t own the asset itself, which means you’re not a shareholder of any company. You make predictions on the price movements of specific stocks that will allow you to make a profit. Stock CFDs also provide leverage, or borrowed capital that you can invest.
Please note that each strategy comes with certain rewards and risks that you need to consider. With the buy and hold strategy, patience is a requirement as well as not letting market volatility affect your decisions. With stock trading, you need to closely watch the market as well as the factors that affect it. As for stock CFDs, you need to be smart about how much leverage you will use, if any. There’s a learning curve to the stock market, so it’s best to test the waters first and see what works for you.
3. Real Estate Investment Trust (REIT)
Most young people don’t have the capital to purchase a property they can lease. One option is to invest in a real estate investment trust or a REIT. REITs are usually focused on commercial properties, like apartments, retail centers, or offices. While you don’t actually own the asset, you will own a stake in it. Your contribution can help fund aspects of owning real estate like construction or management, which can help with generating income.
REITs are considered reliable investments because real estate properties are long-term assets. It’s a great way to diversify your growing investment portfolio and earn a passive income.
Just remember, investing can be risky if you don’t know where to begin. But today, there are many different strategies, tools, and services that can reduce your exposure to risk and help you earn more profit. Being in your 20s is not a hurdle to investing — in fact, it’s your advantage, so use it wisely!
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