Being in your 20s is considered to be the best time to enjoy the good things in life. Especially in this day and age, where living life is equated to traveling around the world while partying all night, being in the 20s is definitely what most teens look forward to.
While this is the case for most people, it is essential to note that it is also one of the best times to start investing. In fact, it is the most crucial time to build your future security and establish your financial status.
For those who are young and have extra money to spare, investing is a great way to secure your future. No one would want to stick the rest of their lives working at an 8 to 5 job, which is why investing is an excellent choice as it can help secure early retirement.
So, if you are one of the few youngsters who are thinking to secure their future, it is essential to take note that there are several stages that every person in their 20s should take. Eagerness alone will not suffice in the investment industry, which is why reading and learning about the know-how of the trade is a must.
Stages to Invest Your Money in Your 20s
Here are the stages that every young investor should undergo before investing and during their investment journey.
The Pre-investing Stage
Before you start putting your money in investments, there are several steps that you must first undergo. By going over these, it helps ensure that you will be committed to investing your money, and you are fully aware of the benefits as well as the risk that comes when entering the trade.
Know the benefits of compound interest
For every person who just got their first salary, it is always tempting to splurge it on new clothes or use it to travel. For this reason, many young adults fall into an endless cycle of spending their salaries on material objects without thinking about their savings.
If you find yourself in this situation, snap out of it and learn about the benefits of compound interest. As complicated and intimidating it may sound, the concept of compound interests is straightforward.
What is compound interest?
Compound interest is the process whereby the interest rates of your savings will accumulate throughout the years. It is the interest that one acquires from the interest of the original capital. To simplify, think of the interest as a snowball that gradually becomes larger, the more it rolls down a hill.
To further illustrate how a compounding interest works, take, for example, when you have a savings of $100, and you deposited only $10 in the first year. If you have an interest rate of 5%, even if you do not make any additional deposit for the second year, you will still receive a more considerable amount than the previous year since the 5% interest will be applied for the amount of $110.
Here is the breakdown of the situation as previously provided:
- First Year – A deposit of $100 was initially made. With an interest rate of 5%, you will end up with $105 by the time the year ends.
- Second Year – When the second-year rolls around, the annual rate of 5% will be applied on the $105, leaving you with a balance of $110.25
If you notice, even without depositing an additional amount, your money will still see an increase for as long as the savings remain untouched. It will also increase if you occasionally deposit a more substantial amount of money.
Imagine if the amount was in thousands, then it follows that the interest rate will also be more tremendous, making your money grow higher throughout the years without the risk of loss.
Prioritize paying off high-interest debts
Not taking care of any outstanding loan can become a substantial financial burden in the future. So, before you start investing, make sure that you have paid off debts with high-interest rates. Letting them linger while you are investing can be quite counterproductive.
Instead of allocating the profits that you get from investing in other goals, it will instead be used to offset debts that will only grow bigger and bigger until you are finally able to pay it all off. It will be like a cat and mouse situation where the investment profit will have to keep up with the piling up of these debts.
To avoid this situation, most financial advisors recommend that starters should first take care of debts that have high-interest rates. This way, you do not have to worry about any obligations.
Set your investment goals
Like every other plan, you should set a goal when you are investing so that you can easily make decisions that lead to your goal. For example, if your goal in investing is to save enough money so that you can travel annually, then your investment plans should be for a short-term purpose. On the other hand, if you partake in investing so that you can retire at an early age, then your decisions will most likely cater to long-term options.
Understand the basics of investing
People today do not even understand how lucky they are to be living in an age where knowledge about anything can be acquired for free. The internet is full of tutorials and lectures on the basics of investing. You can use free platforms such as YouTube and investment blogs.
But, if you have extra money to spare, there are also online courses that you can take for a fee. These online universities can even grant those who completed the course a certificate that you can even add on your resume.
Set aside an emergency fund
Before you dive head-on in the investing arena, it is crucial that you have a lifeboat in case things do not go as planned. That is why it is essential for every investor to first build an emergency fund that is adequate to sustain your needs for a few months when there isn’t any profit from your investments.
By having an emergency fund, you will be smarter in dealing with risks because, as much as possible, you would want to avoid using this fund.
The Investing Stage
Once you have learned the basics of investing and you are already sure that you want to participate in the trade, you are now ready to start investing. Here are the surefire ways that you could spend your money smartly.
Take advantage of an employer-sponsored retirement plan
For people whose end goal is to be financially secured upon retirement, investing through an employer-sponsored retirement plan is the most practical way.
Usually, this works by an automatic deduction from your salaries, which are then routed to your retirement savings. If you want to avoid all the hassle from managing your investments, then you better talk to your employers about this option.
Find a great brokerage firm
For those who have plans for their investment other than retirement funds, getting the services of a brokerage firm is a go-to option. Brokerage firms furnish brokerage accounts that are used in regular investing.
When you avail of the services of these financial institutions, you will get personal financial advisors that can help guide you throughout your investing journey. They will furnish you with research reports from the stock market or real estate market so that you will have a variety of options when selecting which areas to invest in.
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There are tons of brokerage firms that are available in the world. In fact, there are already online brokerage firms that make communication between you and your adviser easier. Online brokerage firms also provide additional benefits such as a real-time asset allocation evaluator, algorithm-based advice, and an investment portfolio analyzer.
Indeed, if you want to seek professional help in your investment, finding an excellent brokerage firm that meets your needs and understands your goal is highly critical to your investing journey.
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Open a short-term savings account
Much like an emergency fund before beginning to invest, it is also equally important to open a savings account where you deposit funds for any emergencies. This will serve as the first go-to option when you are in need of money rather than getting from the emergency fund.
In addition, these savings account will also yield an interest, which is a great passive addition to your increasing growth in investments.
Stock market vs. Real Estate: Where Better to Invest
One of the primary factors that new investors should always take into account is their areas of interest when it comes to investing money in companies.
There are several methods of investing, and those are through stocks, bonds, international securities, and real estate funds. Out of all these, stock market investment and real estate funds are the most popular type.
If you are confused as between these two, here are the key takeaways from these options.
Real Estate Investment
When it comes to battling against inflation, real estate investments are the best option. The value of properties is more likely to increase throughout the years, and for this reason, they do not pose a high risk for its investors when it comes to garnering a profit.
The only risk that comes with real estate investment is the managing and researching efforts that must be done to get the best value out of the property.
Stock Market Investment
On the other side of the coin is investing in the stock market. This is perhaps the typical type of investment that people think about when starting the trade.
One of the most advantageous features of a stock market investment is you get to diversify your money, which provides a lower risk rate than other types of investing. In addition, you do not even have to facilitate the management of the companies that you are investing in. All you need to do is buy stocks and wait for their value to increase at your desired rate.
In sum, real estate investment is a foolproof way to gain profit, yet it requires that you must personally manage it if you want to avoid the extra cost. Contrarily, stock market investment does not guarantee a quick nor high rate of profit, yet it is a passive way to increase your money’s worth.
Learning throughout the whole process
Investing is not a one size fits all situation. One strategy may work for you, and others may not. In the end, it is all about getting all kinds of experiences to make yourself a better investor. One must enjoy the whole process of investing in getting the hang of it much quicker.
Learning about the investment process can also help a person build good financial habits. Being practical when it comes to handling money will only provide nothing but benefits for your future. When you are well-disciplined in assessing financial matters, you are already a step ahead on the road to becoming a financially independent person.
All in all, being a good investor requires certain sacrifices. For some, it needs giving up the occasional shopping sprees and replacing it with depositing the money to a savings account. It is just as important to remember that stepping out of your comfort zone and making practical decisions is the best way to streamline the process of achieving your goals.
Make Good Use of Being in Your 20s
Many young people nowadays take advantage of their youth without taking into account their future. Instead of splurging all your money into temporary wants, you can start investing in and begin to build a strong financial foundation in the years to come.
While you are still at a very young age, you can certainly take advantage of it in a way that will help secure your future financial success. Building your investment portfolio in your 20s is a foolproof way to be financially secure, and as such, you must start as soon as possible, or in other words, now.