When it comes to making plans, long-term savings and investments might be the furthest thing from your mind. “I’m a millennial,” you say. “I have plenty of time to deal with that!” And while this is may be true, technically, it’s totally in your interest to take a hard look at what you can do to get started. “I have plenty of time” turns into “Meh, I’m busy, I’ll deal with it later,” which turns into “Yikes, where did the time go?”
Personally, I remember sitting in a standard 401(k) seminar at work, where younger employees were advised to start saving as soon as possible. The guest investment advisor trotted out a horror story of a sweet old lady who retired with grand plans of freedom and travel, only to find $12,000 in her investment account. The tone and implication were similar to those stories that high school health teachers tell you to scare you away from… well, everything, but it was an effective tactic. Knowing myself, I’d keep putting off big financial investment decisions until “later,” until I was that sweet old lady with no savings. The story may or may not have been true, but it hit the mark.
And the numbers are persuasive. Finance site Betterment lays it out pretty clearly:
Consider this: If you start saving just $1,200 a year—a mere $100 per month—starting at age 25, by age 65 you’ll have about $185,700 (assuming a 6% return).
If you put off investing in your 20s, you’re potentially leaving a lot of money on the table. According to Betterment.com’s example, someone who waits 10 years longer loses almost half of that total nest egg. Plus, you’ll have to answer to 65-year-old-you, too.
Why Start Investing Now?
If you’re in your 20s, entry-level salaries and the costs of living out on your own can make investing seem like an impossibility. Sure, a healthy retirement account would be great to have, but what about rent/food/phone bill in the meantime? Even though it may sound counterintuitive, budget-wise, it’s actually the right time to start down the investment path.
- Time is on your side. Like the old Rolling Stones song, time really is on your side here. The same reason you might be giving to put off investing in you 20s (“plenty of time”) can be tweaked slightly to justify a more proactive approach: “plenty of time…for my investments to grow.”
- You can afford to be aggressive. As you get older, you might be more hesitant to make aggressive or risky investments—after all, you’re getting closer to the time where you’ll want to have access to the money you’ve earned through your investments. When you’re in your 20s, though, it goes back to point #1: you have time to absorb short-term losses, or make higher-risk investment choices that could yield higher rewards. Let’s not forget that investing means buying into the stock market, which always incurs some degree of risk.
- There’s no magic time to start, so why not now? This whole process is on you—it’s your money, and your timeline. If you’re thinking of having a family (however eventually) or buying a house, you’ll become even less likely to think about extra financial matters like investing when you’re busy getting through the day-to-day. If you get started now, making investing a part of your financial routine, it’s one less New Thing to add later when there are extra stresses on your budget.
- You never know what will happen later. Job losses, illnesses, financial curveballs—all of these can happen to any of us. Working on your investments and savings now can help you manage surprises and losses down the road and prevent you from losing more long-term ground than you would if you hadn’t done any saving and investing.
How to Get Started
So now you have the reasons to start investing in your 20s—now what? Let’s look at the things you should start doing ASAP to start making progress in your financial plans.
Pay off your student loans.
If you’re one of the 70% of people who graduated with student loans in the past few years, you know that this is not a little task for you as you start out in your career and in your post-college life. It’s a huge part of your financial picture, and it can seem like a dark, looming mountain that you can’t possibly chip away. Business Insider recommends coming up with a personal spending plan that allows you to pay off those loans as soon as you can, so that you don’t have that debt looming over your future longer than it needs to be there. Do what you can do, as you can do it.
Come up with a budget.
A real and realistic budget of what you have coming in, what you need for essentials, and what you can spend on non-essentials and financial future planning. If you’re not already budget-inclined, it can feel like a pain—especially when it might not allow you to do/buy some of the extras you really want. Once you’re serious about creating a budget you can stick to, there are lots of tools that can help you do it.
Set your goals and start saving toward them.
Want to have a down payment on a house in five years? Take a deluxe trip to Europe for your 30th birthday? Think about some of the big-ticket items you want to have in your future. Once you have those in mind (and an approximate price tag), set a savings schedule.
Sign up for your employer’s 401(k) program.
A 401(k) is a retirement investment account where your contributions are taken out of your paycheck pre-tax. So you’re not only putting your money into an investment account that will chug along under the guidance of investment professionals, but you can decide how hands-on or hands-off you want to be in those investments. Plus, there’s a huge benefit if your company has a policy of matching employee contributions. That, my friend, is free money for your future.
Or sign up for a Roth IRA.
If your workplace doesn’t offer a 401(k) program or you don’t want to go that route, you can also opt for a Roth IRA account. This is also an investment account where you can set automated contributions, but unlike a 401(k), the money in this account is not taxed when you pull the money out for retirement. However, there are also yearly caps and income requirements, so if you go this route, it’s important to understand the benefits and the drawbacks.
Don’t go too crazy.
There’s risk that leads to greater rewards, and there’s risk that leads to a series of bad decisions and a wiped-out investment account. Especially if you’re just starting out in investing, Nerdwallet recommends investing in index funds, a.k.a. exchange-traded funds. In these, you’re buying into a portfolio that includes a number of investments, instead of buying specific numbers of shares of specific companies or commodities. These funds are managed, and save you the hassle of having to choose, monitor, and shift specific stocks on your own.
You’re not in this on your own—there’s an entire industry of financial professionals who can help you navigate this process. If you’re investing through your company’s 401(k) or Roth IRA program, that program will have an administrator and advisor who can help you at every stage of the process. Also, since this is the future, you can also turn to robo-advisors to help you manage your investments. (No flying cars, but for now we’ll take robot advisors.) Unless you’re an expert on the stock market and investment options, get expert opinions to guide you before you put your hard-earned cash into any investments.
Increase your contributions when you’re able.
While much of the heavy lifting in investing is involved in the process of getting started, this isn’t something you should just forget once your investments are up and running. Review your investments frequently, and revisit your investment budget whenever you have an income change (a raise, a promotion, a new gig with a higher salary, a side hustle that’s paying off). Make sure you’re increasing your investment contributions as much as you can, when your budget allows.
And the most important next step of all: don’t be afraid. As a twentysomething, you have the luxury of time and long planning to support your investment decisions. No matter what your salary and your budget are, it’s worth it to move past your reservations and start investing what you can. Starting small can have lead to rewards later, so why not start now? Future You will thank you, from that comfortable retirement chair.