Why Your 20s Is The Best Time To Start Investing
Millennials are pretty optimistic about their current and future financial situations. However, while Millennials are optimistic about their current and future finances, they might not be as confident as they seem. They actually don’t invest. Why? Well, according to a STASH survey, Millennials find investing confusing and think they need lot of money to get started. They also don’t see themselves as investors - 60% of Millennial women think of the typical investor as an “old white man”.
Connect The Dots
While it can be difficult to correlate saving or investing to a future goal, it’s important to understand how the two are connected. Besides helping you grow your wealth, “working with an advisor actually helps you connect specific behaviors like saving and investing to your life goals” says Barbara Foy-Pilchner, Managing Director – National Accounts, Manulife Asset Management. “It creates accountability when you have committed to a plan in writing.” Having an advisor also makes it much harder to use ‘YOLO’ as a reason for making questionable financial decisions. “Because you have someone else in the equation (your advisor), it’s much more difficult to bail out on your goal.” Along with needing some financial guidance, “many Millennials don’t see the benefits of compound rates of return because they are so focused on the ‘here and now’ and on immediate gratification” explains Barbara. “That’s the type of society in which they’ve been raised. We need to educate them on the benefits of saving just a little each month in order to meet their long-term goals. Time is on their side right now.” Last year, Millennials spent more on their daily coffee fix than they did any kind of retirement savings but are worried that they won’t be able to retire until they’re 65 or older[1]. For many young people, there’s an obvious disconnect between having future goals, and needing to save or invest money now, in order to make those goals happen.
So, while some Millennials might not see the value of investing in something that has delayed gratification, here’s a look at why it’s best to start investing in your 20s:
Scenario A: If you’re 25 and have no investments and plan to invest $1,200 at the beginning of each year at a rate of return of 5% for 35 years you’ll end up with $113,804.
Scenario B: If you wait until you’re 30, have no investments and plan to invest $1,200 at the beginning of each year at a rate of return of 5% for 30 years you’ll end up with $83,713. If you started investing 5 years earlier, you would have had $30,091 more.
[1] http://www.refinery29.com/2017/01/136539/millennials-spending-more-coffee-retirement-savings
Try It Yourself
5 years may not seem very long, but it makes a big difference. Getting an early start not only helps to build wealth, it also sets the foundation for healthy financial habits.
Both saving and investing have an important role to play in your financial plan but remember that there’s a difference between the two.
Saving |
Investing |
Goal: Keep money safe Short-term (usually no more than 7 years) Low risk Returns: Low Can access money easily: Yes |
Goal: Make money Higher Risk Returns: High – depending on where and how your money is invested. There’s also higher risk of losing money. Can access money easily: Yes, but requires some effort and there may be penalties for early withdrawals. |
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