You’ve probably heard that investing is key to building wealth, but for many young people, it’s not a top priority. However, the earlier you start investing, the more time your money has to work for you, which is why learning how to invest at an early age can help you achieve long-term goals.
Young investors have the great advantage of a longer time horizon to grow their investments. In this article, we’ll break down some simple advice for young investors from financial professionals, so you can put your money to work sooner.
Key Takeaways
- With the power of compound interest, you can grow your money exponentially.
- Set specific financial goals and have a set time period so you can make better investing decisions.
- Consider making consistent contributions to a diversified tax-advantaged retirement account.
- Avoid making investment decisions based on emotions such as fear or greed. Instead, follow a preset strategy.
Why Should You Invest When You’re Young?
When you’re young, you may not prioritize making an investing strategy for long-term goals. But the earlier you start investing, the more likely you are to be successful in reaching your goals.
Investing earlier is key to getting the most out of the power of compound interest. Essentially, the money you invest will earn a return that is added to your investment. With a subsequently larger amount, you earn a larger return, and so on. In this way, your earnings grow at an increasingly faster rate.
Imagine you started investing $100 per month when you were 20 and earned an annual rate of return of 8%. With compounding, by the time you turned 60, your account would be worth more than $310,000, but you would have only invested $48,000. If you had started that same investing strategy at age 30, you would have only about $136,000 at age 60, which is less than half of what you would have if you’d started at 20.
Investing from a young age also helps you combat inflation. Over time, the value of money decreases because of the increase in the prices of goods and services. For example, from April 2021 to April 2022, the cost of goods and services rose by 8.3%. If your money didn’t grow by that amount, then you lost spending power. Over several decades, inflation can wipe out a significant amount of your money’s value.1
Note
If your money grows at a faster rate than inflation, then you can prevent inflation-related losses.
Tips for Young Investors
Many young investors who recognize the value of investing may wonder how to get started. Here are seven tips from two financial experts.
Set Investment Goals
Every investing journey should start with setting specific financial goals. You then can work back from your goal to calculate how much you need to save each month to achieve it. Having a specific investment goal and investing horizon also helps you determine your level of risk tolerance. That helps you choose your investments.
“For example, retirement savings that have a time horizon of 10, 15, or more than 20 years can benefit from additional risk by investing in the stock market and riding out periods of volatility,” Kyle McBrien, a financial planner at Betterment, told The Balance in an email. “On the other hand, if you are saving for something more short- or medium-term, such as a new car or home, then those funds should be in a lower-risk portfolio since there is less time to recover losses.”
Note
One common investing goal is saving for retirement. By starting when you’re young, you can afford to take a more aggressive approach with your portfolio. Investors near retirement age would want to be more conservative so they don’t risk losing their retirement money.
Start With Tax-Advantaged Retirement Accounts
Investors can see significant benefits with a tax-advantaged retirement account such as an IRA or 401(k). These accounts offer tax advantages either with deductible contributions with traditional plans, or tax-free withdrawals on earnings in retirement years with Roth plans.
A 401(k) plan may be offered through your employer. You can open a traditional or Roth IRA on your own.
Take Advantage of Matching Funds
Many employers offer matching contributions in their 401(k) plan or another employer-sponsored retirement plan. For each dollar you contribute, your employer will match your contribution up to a certain percentage of your compensation.
“That means for every dollar placed in retirement savings, an employer will contribute a small matching percentage for free,” Jordan Grumet, founder of Earn and Invest and author of “Taking Stock,” told The Balance in an email. “This can often come to thousands of dollars a year.”
Note
Your employer match represents a 100% return on your investment. Aim to contribute at least enough to take advantage of the full match so you’re not leaving “free money on the table.”
Diversify Your Portfolio
Diversification is one of the most important principles of long-term investing. When you diversify, you spread your risk over several investment types. That way, if one of your investments suffers losses, it does not have as significant of an impact on your portfolio as it would if it were your only investment.
