You are in your 20s, executing your 9-to-5 job and enjoying the financial freedom you have always craved for. Suddenly, you start receiving an unsolicited series of questions from your best buddy – “When are you going to start investing?”, “What’s your financial plan for the future?” and the whole gamut of queries one can imagine.
But let’s face the fact that your 20s is the right age to start making your financial decisions. It’s equally worth noting that these decisions are most crucial at this prime time than at any other period in your life. And when savings are on hand, inculcating investment habits in your twenty-somethings by methodically contributing to your investment portfolio can reward you in ways you couldn’t imagine.
Thanks to the power of compounding, your investment can grow exponentially with time and pave your way to a stress-free financial life in the future. If you don’t know how to get started, scroll ahead and read the guide that demonstrates how to make the right move, investment avenues, and investment tips to stay ahead of the curve.
Why Start Investing in Your 20s?
When the term ‘investment’ comes to your mind, you may be drawn towards it either because you want to reserve a pool of wealth for your future or want to save on your taxes. But wait! There are more reasons to invest in your 20s – even with a low salary.
1. You Will Save Tons of Money
Since you have a hefty amount of time lying ahead of you, compounding can engender enough wealth for you in the future. A single INR 70,000 investment at age 20 will contribute to a wealth gain of INR 6,50,000 after 40 years (as per a 6% interest rate). That same investment done at age 30 generates a wealth gain of INR 3,32,044 by age 60.
This means the longer the investment amount is put to work, the bigger can be your pool of wealth. This is just an example to show how kicking the investment game off early can pay off huge.
2. You Can Learn and Refine Investing Strategies
Whether you are investing in shares in your 20s, mutual funds, or any other scheme, you have enough time and flexibility to refine your investing strategies after falls and goof-ups. And if you succeed, there will always be room for improvement and eventually level up your investment game.
3. You Can Take More Risks
Young investors have a greater risk tolerance when it comes to their investment activities. Millennials in their 20s have a long way to go until retirement, which is why they are always encouraged to create more aggressive investment portfolios that are more volatile. They can withstand the pressure to produce larger gains in the fullness of time.
4. You Reach Long-Term Financial Goals Easily
Want to get married in your late 20s? Save enough for your first future child’s college tuition? No matter what your long-term goals are, you can get the ball rolling as early as you can with a solid investment plan, consistent savings, and apt investment vehicles.
There are a plethora of investment types that can help you achieve your long-term goals a bit easier. When the time horizon is long, potential savings vehicles ranging from intelligent stock market investing and ETFs to savings accounts and bonds are hard to beat.
How to Start Investing in Your 20s
Let’s look at a few easy ways to kick start your investment journey, along with the right investment avenues for youngsters:
1. Reckon Your Financial Goals
Set up your financial goals – both short-term and long-term and then fill the money into different ‘baskets’ in accordance with those goals.
For instance, if you want to buy a home after 10 years, the money you will save will be earmarked to the goal ‘down payment for future home’. The same goes for your future child’s future studies, your retirement savings, and so forth.
2. Decide Where to Put Your Money
Once you have reckoned your financial goals, it’s time to set up your accounts. For short-term financial goals, rely on your bank’s high-yield savings account. If you want to save for a couple of years, go for high-interest saving accounts, certificates of deposits (CDs), or money market accounts.
For long-term investments, advisory-based ETFs are a profitable way to invest your savings.
3. Think About the Assets to Invest In
When it comes to picking assets to invest in your 20s, you have a cornucopia of options to consider. Let’s dissect the popular ones:
- Bonds: Although bonds carry lower risk than other investment assets and involve a fixed interest rate, their reduced liquidity makes them fare poorly. However, one can invest in bond ETFs that offer desired liquidity.
- Stocks: Stocks allow you to earn through dividends or capital appreciation from the publicly traded company. They boast a wide range of advantages, including liquidity, hassle-free trading, and dividend benefits. However, shares can fluctuate and are generally considered high-risk.
- Mutual Funds and ETFs: An investment type like stocks, bonds, or the combination thereof comes under ‘fund’. Mutual funds save you from the risk of putting all your eggs in one basket. ETFs are similar to mutual funds, except for the fact that they are passively managed. (Note that the assets under ETFs stood at INR 2.18 lakh crore as of Sep 2020, which is 43.22% more than that of last year).
It’s easy to assume that youngsters aren’t proactive about their wealth management at first, but data says otherwise. Thanks to millennials stepping into the world of investments, active investor accounts have shot up, creating a whopping record by jumping to 10.4 million in 2020.
Moreover, retail ownership for companies registered with the National Stock Exchange of India Ltd. rose to 9% in Q3 of 2020, which is the highest since March 2018.
With an increasing number of millennials piling into savings and investment vehicles, it’s never too late to take stock of your finances.