For the young who are trying to take a more proactive approach in managing their money, the first step towards achieving financial freedom is to invest.
It’s one of the best ways to build a life that isn’t entirely dependent on your paycheque, and to secure a sound financial future for the long haul.
The good news is, if you’re a young investor, you have time on your side. Unfortunately, too many people take their youth for granted, and begin saving and investing only later in life, which could limit the risk that one can take.
If you’re under 25-years-old and are looking to get involved with investing, here are five tips to help you start building a solid financial plan:
1) Pay off existing debt
The caveat when it comes to effective financial planning is that you MUST pay off any existing debt, especially credit card debt.
The reason for this is simple – it doesn’t matter how much money you make, the interest you pay on a credit card when you don’t pay your bills in full will gnaw away at your returns and may even outstrip the profits you make!
It doesn’t help that credit card interest rates in Singapore are among the highest you will encounter – at 24% per annum on average. In Phillippines, it can go up to 36%! This can cause even small debts to snowball out of control in a matter of months.
Remember that you cannot be financially free with debt. Avoid losing money unnecessarily by making sure to clear off any outstanding debt and be on your way towards building some serious wealth.
2) Invest your savings
A penny saved isn’t always a penny earned and saving money alone won’t make you rich, especially if your idea of doing so is by stashing your hard-earned cash under your pillow.
By definition, saving involves the preservation of money from physical loss. Investing, on the other hand, involves taking some of your money and buying things that might increase value (such as stocks), with the goal of growing your capital and also safeguarding it from external factors like inflation.
So while saving money is a virtue, the act itself will merely create an opportunity for you to get rich though other platforms like investing. Meanwhile, investing lets you capitalise on opportunities to potentially create wealth.
Think of saving as having a golden egg and investing as having a golden goose. One key factor to building a profitable investment portfolio is by choosing the right asset allocation according to your personal investment goals and individual financial situation, such as investment horizon and risk appetite.
3) Understand the value of compound returns
One reason why you shouldn’t put off your investment plans for too long is because procrastinating can take a huge bite out of your long-term earnings.
Tom and Harry, both 21, start their first job where they receive the same salary. Tom decides to start a savings account with an initial amount of $1,000 and continues to put $100 into his savings every month. Meanwhile, Harry decides to wait till he’s older to start saving.
If we assume an annual return rate of 2%, Tom would have accumulated $14,478.68 in 10 years.
Elsewhere, Harry finally decides to start saving at age 31. Like Tom, he sets aside an initial amount of $1,000 and allocates $100 for his savings every month.
Going by this, Tom would have approximately $86,555.04 in his savings account by age 65.
Meanwhile, Harry, who started saving 10 years later, would have $60,127.72 (roughly 30.5% less) in his account by age 65.
Harry could try to accumulate $86,555.04 by age 65, but because he started 10 years later, he would need to save about 50% more every month in order to reach that goal.
4) Take risks while you’re young
Youth is not always wasted on the young if you know how to play it to your investment advantage. Younger investors with time on their side can afford to step up the risk ladder, given that they have many years of earning potential ahead.
Younger folks also have a longer investment horizon, and hence more time to ride out the market’s highs and lows. This means they can afford to adopt a more aggressive investment strategy compared to an investor who is nearing retirement.
For example, an investor in his 20s might want to consider putting his money on higher-risk investments, such as equity, which could potentially generate much higher returns compared to lower-risk investments like bonds.
5) Start building your retirement nest
While retirement is probably the last thing on your mind when you’re in your 20s, it is never too early to start and investing in these early years plays a crucial part in building a comfortable retirement nest.
Think about it – the earlier you start investing, the more time you have to grow your retirement funds. Plus, having a longer investment horizon means you don’t have to be overly concerned about market volatility as you have the luxury of time to ride it out.
Of course, investing at a young age isn’t always easy, especially if you’ve just joined the workforce. However, the long-term benefits are numerous and simply cannot be overlooked.
Finally, the earlier you start investing, the more time your investments have to mature and there’s never a better time than in your 20s to maximise your earning potential!