The Benefits of Investing in Your 20’s
Friday, January 17, 2025
For most people in their 20’s, retirement is one of the farthest things from their mind. And understandably so! People in their 20’s have a lot of life in between now and when they plan to retire. However, there are a lot of amazing benefits to investing in your future early, and building good financial habits that can carry through the rest of your life.
Perhaps the biggest benefit is taking advantage of compounding gains, which allows for money invested in your 20’s to achieve more significant long term growth than money invested down the road.
Let’s look at a hypothetical example: Two people, age 25 and 35, want to retire at 65. They both invest $5,000 and regularly contributed $50 per month at an 8 percent rate of return, compounding annually. For the person who began at 25, he or she will have contributed $29,000 over the course of 40 years. The account value would be about $264,000. For the person who began at 35, he or she will have contributed $23,000 over the course of 30 years. The account value would be about $118,000.
That 10 year difference sure made a big impact on the final account value! Despite contributing just $6,000 more over the life of the account, the person who began at 25 has $146,000 more at retirement. That’s the power of compounding growth.
There are a lot of amazing benefits to investing in your future early, and building good financial habits that can carry through the rest of your life.
Now, it’s very important to point out that this is a hypothetical. I utilized a fixed rate of return to simplify the example and make the numbers a little cleaner. In real world investing, rates of return can vary greatly depending on the performance of the stock market.
One of the other major benefits is building good financial habits. Although this may seem simple, it can be hugely impactful. I remember getting my first paycheck when I worked at an ice cream shop in high school. My dad recommended that I start the practice of saving and investing immediately. In my 16 year old brain, that was something I would start doing when I made more money. His response was “If you don’t start doing it with $5, you’re not gonna do it with $500.” I think there are wisdom in these words! If you wait to start, you run the risk of always moving the goal post. Delayed action is denied benefit.
Before jumping into the world of investing, there are a few steps a young person might want to consider taking to set them up for long term success.
Do you have money set aside for an emergency? Creating an emergency fund is a great way to help protect your investments. An emergency fund is usually about 3-6 months of expenses that you save incase of a financial emergency. Working hard to build your investment portfolio, only to have to pull money out to repair your A/C, fix a broken down car, or pay a medical bill can be a discouraging feeling. An emergency fund helps to insulate your investment account so that when something inevitably happens in your life, your investments can stay put helping you keeping your positive momentum on track.
The next consideration is debt. Many young Americans are saddled with high interest rate debt, the main culprit being student loans. Monthly payments on high interest rate debt can make it hard to establish your footing when investing, so paying off loans as early as possible can be a great precursor to investing.
Another major consideration is financial literacy. Do you understand the basics of investing? Concepts like compounding gains (mentioned earlier), time horizon, risk tolerance and tax liability are all helpful if not essential for success investing. One of the easiest ways to get financially literate is to find a trustworthy financial professional to help explain complex concepts, and examine your unique situation.
Monthly payments of high interest rate debt can make it difficult to establish your footing when investing, so paying off high interest loans as early as possible can be a great precursor to investing.
Getting your financial house in order in your 20’s can seem like a daunting task. With climbing inflation over the past several years, and an unfriendly environment for first time home buyers, it can be easy to grow pessimistic. So give yourself every advantage! Start where you can with what you can, and take advantage of compounded growth.
Although this is geared toward people in their 20’s, its never too late to start saving and investing in your future. If you or someone you know has any questions, please reach out to us! We love helping people understand investing, and establishing good financial habits that will better allow them to achieve their financial goals and ultimately retire with dignity.
M. Grant Pannell Financial Advisor
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The hypothetical example in this material is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.)
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