How To Start Investing As A Young Adult- 02.20
Michael D'Angelo- February 2020
You’ve made the decision to invest. This is a choice only some adults make when they’re twice your age. Yet whether you just graduated from post-secondary school, or you’re several years into the “real world”, you might think your youth is a drawback. It can actually be quite the opposite. If you invest now in your 20s compared to your mid-30s or early 40s, your money has longer to become valuable.
Of course, investments are complicated dealings. Here’s what you should know before diving in head first.
Have an Understanding of How Investing Works
It’s your money you’re going to invest, so you should know where it’s going, how it’s used, and how it may increase over time. If you’re already studying finances, you may have a solid understanding of the stock market and investments.
If you’re pursuing this as a hobby of sorts, it’s time to learn. Yes, the world of investments may be complicated, but take the time to absorb everything and ensure this is something you want to get involved with for a while. The greatest principal to learn at this stage is the value of compound interest. Compound interest is the type of interest you accrue when the interest you earn on your savings or investments begins to compound on itself.
Let’s say we start with a $1000 investment that makes 5% in Year 1. After Year 1, your initial $1000 investment with a 5% gain will total to be $1050- a $50 gain. This interest will start to be compounded in Year 2 when instead of making let’s say the same 5% on your initial $1000 investment, you are now making it on $1050, which totals to $1102.50- A $52.50 gain. One crucial component of compounding interest is that the more time your investments have, the greater the compound interest effect can be.
So, the younger you are when you start investing, the better your chances that your investments will accrue a greater return.
This comes as no surprise, but you need to have the cash handy to spring towards the investment. It doesn’t always have to be a huge sum, but still, it shouldn’t set you back financially to invest. If you can’t, it’s better to wait to invest until you’re more financially comfortable.
Don’t Expect Results Overnight
If you’re investing because you think it’s some sort of way to make millions overnight, you’re going to be sorely disappointed. Yes, some people do invest in a new company and eventually make a lot because that company takes off. That said, this is not an overnight process. It can sometimes take a decade or longer before you see a real payoff on your investment. You’re going to have to be patient.
Be Ready for Ups and Downs
Sometimes you think an investment is going to perform really well, so you invest in it accordingly. Then the company tanks or has a major PR crisis that sees a major decline in its price.
It happens to even the savviest financial experts on Wall Street, so of course it can happen to you, too. Instead of being fearful from investing again, chalk it up to a learning experience and try to avoid the same mistakes next time.
Investment guru Warren Buffet once said, “I know what markets are going to do over a long period of time: They’re going to go up. But in terms of what’s going to happen in a day or a week or a month or a year even, I’ve never felt that I knew it and I’ve never felt that was important.”
Understand how it works. If you don’t understand, speak to a professional that does and get yourself educated. Be ready for the ups and downs and most importantly… Be patient! Let your money work for you and enjoy the ride.