Why you should start investing in your 20s
Have you ever thought about investing your money in things that aren’t going to give you immediate returns? Building wealth in your 20s in Australia might not seem necessary, but the earlier you put money into long-term investment strategies, the more benefits you’ll get over time.
Compound interest in a savings account can help you to achieve your financial goals. Essentially it works by adding any interest your initial deposit earns to the same account, and the next interest payment is made based on the total balance. It’s interest on your interest, and the earlier you start, the more you’ll be able to accrue.
What do you require to invest in your 20s?
Investing in your 20s can take some training, because you’re putting away money that you could otherwise by spending on new clothes or entertainment or holidays. You also need a sound credit report free of debts (ideally) and defaults.
Minor defaults, such as late bill payments, can stay on your credit report for up to five years after the debt has been repaid. Court writs last four years on the report, and serious financial infractions such as bankruptcy can last seven years. With these marks on your credit report, some lenders will look unfavourably upon you when you apply for a home loan, for example. That could affect your ability to buy a house.
The lending institution might only agree to give you a certain type of loan whereby you need more for an initial deposit. That requires you to save more, which could cut down the amount you save each month, and as we’ve already seen, that can be incredibly costly in the long run. Do everything you can to avoid picking up defaults on your credit report, because it could impact what you can invest while still taking the next steps on your life ladder (i.e. buying a house or starting a family).
Make sure your savings strategy and credit report don’t affect your ability to live your life.
The same goes for debts – when you have debts hanging over your head, you’ll need to direct a portion of your income toward paying that off. Whatever amount you put aside will either come out of your necessary expenses money, or your monthly investing / saving money. Both are detrimental to your overall financial situation, so work hard at paying off your debts and keep your credit report free of defaults before you start investing regularly.
What are some easy investment strategies to stick to in your 20s?
Starting your investment strategy early and well can set you up for long-term success. Getting into the right habits is important, such as investing monthly instead of annually. T. Rowe Price data shows that investing monthly generates greater balances in 98 per cent of 10-year rolling investment portfolios.
Further to investing monthly, invest the same amount each time. This will allow you to stick to your budget because you won’t be emotionally reacting to market changes and throwing more money at a particular investment because you feel like it’s about to rapidly increase. This strategy means you can take advantage of falling share prices by buying more low-risk shares, while not adding too much risk to your portfolio when buying growing shares because you can’t buy too many.
Limit your financial risk by investing the same amount each month.
One easy way to invest systematically in this way is to set up an automatic savings / investment payment. This operates in the same way as a regular automatic payment does, but rather than going toward a bill, it’ll be put into an investment account and used to buy shares or compound your savings.
Something that many young people might not consider before investing is getting professional help. A financial advisor or investment broker can point you in the right direction regarding stocks and shares or investment accounts based on your income and your overall financial goals. If you intend to have 10 times your annual salary saved by the time you retire (a sound benchmark), a financial advisor will be able to help you calculate that total. It can be daunting to start putting money into investments that you don’t fully understand, so having someone with years of experience guiding you through the process can be a great help.
There are many ways for millennials to invest early in Australia, but it requires self-control and some forward thinking to get started. Before you begin, make sure your credit report is clear of defaults that could affect your ability to move forward with your family and you don’t have any major debts. Want to check your credit report? You can do that right here at Credit Simple.
Francis is Credit Simple's resident content writer and social media guru. He's passionate about saving money, so we pay him 5 cents to go out and fetch the team coffees every morning. Thanks Frankie.All stories by: Francis Church