Matt Stead
Workers in their 20s are still figuring out professional norms and learning to budget for necessities. Investing for retirement might not be high on your list of financial priorities when you’re new to earning a paycheck – especially when your peers are spending their disposable income on entertainment. But moving investment to the top of your priority list will pay off in ways you can’t even imagine. Want to create wealth for your later years? Investing in your 20s could be the cheapest way to do it.
The 10 vs 30 Rule
Though your salary might be one of the lowest in your workplace, your dollars have more investment power than those of your older peers. We can illustrate this using something called the 10 vs 30 rule. (Check out our video about the 10 vs 30 rule on YouTube) Take two 25-year-old workers. At 25, Sally commits to investing $500 per month for the next 10 years, until she’s 35. With a growth rate of 6.5%, at 65 she will have accumulated $565,000 in her investment account.
John’s the same age as Sally, but he doesn’t start making monthly investments of $500 until he turns 35 – just as Sally is ending her monthly contributions. If he continues making monthly investments of $500 over the next 30 years, and his account also grows at a rate of 6.5% per year, he will have $552,000 in his account at 65.
John waited much later than Sally did to start investing, and ended up with just $13,000 less in his account than she did. But these two workers made radically different contributions to their investment accounts. Sally invested $60,000 between 25 and 35. John had to make 30 years of contributions, for a total of $180,000, to end up with an account that’s worth less than Sally’s.
Sally earned interest on her investment, and when that interest was added to her principal, she earned interest on that new higher amount – and so on and so forth. Over the course of four decades, she turned $60,000 into $565,000. And she stopped making contributions at age 35.
That’s the power of compound interest. Earning interest on your previously-earned interest is like getting free money. There’s even an urban legend that Albert Einstein once described compound interest as the eighth wonder of the world. Whether or not he really said that is doubtful, but there’s a reason that people find such a quote plausible: Harnessing the power of compound interest is one of the single most powerful ways to grow your money.
More Benefits of Investing Early
The average 20-something worker has several remaining decades of earning potential. That time is a kind of safety net from an investment perspective. Say you invest a chunk of your savings in high-risk stocks that ultimately lose half their value. That’s a short-term loss, but it doesn’t have to affect your ability to retire comfortably. Assuming you stay healthy and able to keep earning an income, there’s plenty of time to recoup your losses and build a strong portfolio.
By contrast, workers who are approaching retirement age can’t afford to take big risks. They have a finite number of remaining years in the workforce and may not have the time to earn back the money if they lose.
There’s another key reason it can pay to start investing early. Remember the sense of freedom and power you had when you received your first paycheck? Having your own money that you can spend however you want to is an intoxicating thrill. When you’re first starting out (and probably not earning a ton), it’s so easy to make major money mistakes. Your friends are planning a trip to Vegas and you deserve to have fun, too! Suddenly the weekend’s over and you’re $2,000 poorer with nothing to show for it but a hangover.
When your peers are making short-sighted financial decisions, racking up credit card debt and living beyond their means, you could be growing a small fortune. Investing in your 20s forces you to build good habits around money management and saving. It’s much harder to build these habits when you first start making money than change bad habits in your 30s, 40s or beyond.
Finally, keep in mind that your financial future is uncertain. The economy fluctuates. Your health status could change and force you into retirement much sooner than you anticipate. Making savvy investments early in your adulthood could provide the safety net that you hope to never need.
What else does the road ahead have in store for you? Protect your financial future by making savvy investments while you’re young. Still feel overwhelmed by investing? Check out our Ascend program, designed for young professionals. If you’re ready to take the first step, Contact Sachetta to get started.