No matter your profession or income, the best time to start investing is: as soon as possible. Sure, your budget might be tight as you cope with things like rent, car payments, and student loans, but you’ll want to allocate at least some portion of your money towards investing. That is because, unlike past generations, you’ll be held accountable for funding your retirement.
Furthermore, if you don’t invest early on, it will be much more difficult to achieve your financial goals later in life. Why? Compound interest. Albert Einstein, himself, even deemed compound interest as the ‘eighth wonder of the world’; stating, “He who understands it, earns it… he who doesn’t… pays it,” (and Albert knows all, right?).
Unlike simple interest, which will have you earning the same percentage of the principal year by year, compound interest will earn you interest on your interest (sound interesting?). In other words, suppose you invested $100 and it earns 6% interest every year. At the end of the first year, you’ll earn $106, but by the end of the second year, you’ll earn $112.36. Although you only earned 36 cents on the $6 in interest, these amounts add up—amounting to huge earnings over time!
To get an idea of how effective compound interest can be in increasing your overall financial wellbeing, let’s consider another example. Suppose you’re investing $3,000 every year with the same return of 6% every year. In 40 years, you’d have amassed almost $500,000! Given that your retirement is also about 40 years away, there’s plenty of time to let compound interest grow your money so you can enjoy a prosperous retirement.
“Okay, you’ve convinced me. So where do I start?”
It’s elementary, my dear Watson! A 401(k) is one of, if not, the most important investment you can make in your 20s. A 401(k) is a retirement savings fund sponsored by your employer that will allow you to set aside a portion of your paycheck before taxes are taken out. Most employers will match some part or your entire contribution, so you’ll want to invest as much as possible into it.
For some, this might mean 2% of your income, until you reach a point where you feel comfortable increasing your contributions. For others, this might mean much more. Most financial experts recommend investing 10 to 15 percent of your income in your 401(k). Fortunately, some mobile banking services can now automatically save just that, making it clear what portion of your budget you can allot toward investing, and what portion you can allot toward for everything else.
If your employer doesn’t offer a 401(k) plan, or if you have room in your budget and want to maximize your money, invest in a Roth IRA (Individual Retirement Account). Wealth management services like Fidelity and Vanguard are two great options to help you get started in that both require minimal fees. The advantage of a Roth IRA is that your investments are not liable to tax when you go to withdraw them upon your retirement (assuming you retire after the age of 59½). You can still withdraw before the age of 59½; however, in this case, the interest that you’ve earned is liable to tax—which could net you a loss of thousands (even tens of thousands!). Therefore, it is highly advised that you do not withdraw from your Roth IRA until you are 59½ years old or older.
When you’re finally set up and deciding what to invest it, keep things simple. Prioritize index funds. Index funds are an excellent choice for young investors given their affordability (you can get started with only $25!), low risk, and in that they do not require regular management efforts.
The Standard & Poor’s 500 Index (or S&P 500) is an example of a index that features 500 of the largest publicly traded companies in the U.S. Given the composition of the index, your investments risk far less than if you had the same amount of money invested in only one company. Instead, your investments are subject to the conditions of the market as a whole.
But should the market tank, don’t fret. Follow the advice of billionaire investor, Warren Buffett, and stay the course. Keep buying when prices are falling. For when their value comes back around, it will be you who comes out on top!