For many young people, it seems easier to put off any investing decisions until their financial situation becomes, at least theoretically, more stable. Twenty-somethings, however, are actually in a prime position to enter the investing world, even with university debt and low salaries.
While money may be tight, youthful employed individuals have a time advantage.
There is a reason that compounding - the ability to grow an investment by reinvesting the earnings - was referred to by Albert Einstein as "the eighth wonder of the world." The magic of compounding allows investors to generate wealth and requires only two things: the reinvestment of earnings and time.
A single £10,000 investment at age 20 would grow to over £70,000 by the time the investor was 60 years old (based on a 5% interest rate). That same £10,000 investment made at age 30 would yield about £43,000 by age 60 and made at age 40 would yield only £26,000. The longer money is put to work, the more wealth it can generate in the future.
An investor's age influences the amount of risk he or she can withstand. Young people, with years of earning ahead of them, can afford to take on more risk in their investment activities. While individuals reaching the age of retirement may gravitate towards low-risk or risk-free investments, such as bonds. Young adults can build more aggressive portfolios that are subject to more volatility and stand to produce larger gains.
Human capital, from an individual's perspective, can be thought of as the present value of all future wages. Since the ability to earn wages is fundamental to investing and saving for retirement, investing in oneself - by earning a degree, receiving on-the-job training or learning advanced skills - is a valuable investment that can have strong returns. Young adults often have many opportunities to increase their ability to earn higher future wages and taking advantage of these opportunities can be considered one of the many forms of investing.
The Bottom Line
Saving for retirement is not the only reason to make well-planned investments. Many investments, such as those made in dividend stocks, can provide an income stream throughout the life of the investment. Twenty-somethings have certain advantages over those who wait to begin investing, including time, the ability to weather increased risk and opportunities to increase future wages.
The information contained within is for educational and informational purposes ONLY.
It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within.
Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision.
Please contact your financial professional before making an investment decision.