3 Reasons To Start Investing In Your 20s

1) You Have A Greater Opportunity To Compound Your Wealth

The biggest asset, by far, that young professionals have on their side when investing is time. The more time you have until retirement, the greater the opportunity to reinvest your dividends, interest, and capital gains. Start early and you exponentially increase your return on investment. This is called compounding. To illustrate how powerful compounding can be if you start investing early, consider this comparison when starting at age 20 vs. waiting until age 30:

*Disclaimer: Investing in a way that mirrors the S&P 500 will be suitable for many, but not all, young investors. Doing so involves taking on a level of risk/reward that may not be the best fit, depending on the investor’s financial situation and risk tolerance. Information presented here is for educational purposes only. Investments involve risk and unless otherwise stated, are not guaranteed.

These two individuals each invest $5,000 annually and each earn the same return throughout their career. Notice the difference in potential account growth as they reach age 45, 55, and 65. If you compare their ending balances, there is a significant gap in values (“growth difference”). The investor who started 10 years earlier ends up with a lot more, while only investing $50,000 more between ages 20 and 30.

How can this be? Compounding.

2) You Can Be More Aggressive

Your timeline to invest is the longest when you are first starting your career. For most, this allows you to be more aggressive and invest in pockets of the market that pose a greater risk, but also offer a greater return. If you wait 5, 10, or 15 years, you may not be able to take on as much investment risk (or feel as comfortable doing so). Assuming greater risk at a younger age can provide a learning experience as well. You are more likely to make mistakes, which is okay because you still have time to correct those behaviors and avoid repeating them at a later age when such mistakes could cause more serious damage to your long-term finances.

3) You Avoid Having To Play Catch-Up

Life gets more complex with age. As your financial responsibilities expand this could obstruct your saving/investing progress. Your budget and investment capabilities will evolve when you take on a home mortgage and/or have children, which could put investing on the back-burner. You cannot afford to fall behind when saving for retirement amid navigating new obstacles as your life unfolds.

Implementing a process where you can contribute to an investment account on a monthly or yearly basis is important, but especially in your early adult years. Once your basic savings are sufficient, I highly encourage you to start investing any excess income. This could mean enrolling in your retirement plan at work (i.e., 401k) or simply increasing your contribution amount if you already participate. If you already contribute a healthy amount to your retirement plan at work, consider a Roth IRA or brokerage account to help diversify your investments.

Take advantage of your 20s. These years can be extremely valuable in boosting your long-term financial success. What you accomplish early in your career lays the foundation for the decades to come.

I hope you enjoyed reading!

Joshua J. Baird
Investment Adviser Representative