Young investors have to contend with an unfortunate irony. On the one hand, you have an abundance of an invaluable asset: Time. That’s one of the most powerful ingredients for successful investing. On the other hand, you probably don’t have a lot of money to invest! What’s a young person to do? Here are three suggestions.
1 – Understand the opportunity. Some young people put off investing for retirement because it seems like such a distant goal and they simply don’t realize how much difference it can make to start investing as soon as possible. Consider this. A 20-year-old who invests $200 per month and generates an average annual return of 7% will end up with over $1 million dollars by age 70.
But what if she did things differently? Instead of starting to invest at such a young age, what if she figured she had plenty of time to get to that later? So, she starts investing $200 per month at age 30. Let’s say that at that point she does the same thing — invests $200 per month and generates an average annual return of 7%. By age 70, she will only have invested $24,000 less ($200 per month times 10 years). But she will end up with about $500,000 less! That’s the incredible difference time makes in investing.
2 – Be proactive in freeing up money to invest. There are four main things you can do with money. You can spend it, save it, invest it, or give it away. The order you choose will make a huge difference. When people say they don’t have enough money to be generous or to save, it’s often because spending is their first priority. They start earning their first full-time salary and immediately think of all the things they can buy.
Here’s a more effective approach. Start with your gross income (the amount before anything is deducted for taxes or anything else) and allocate 10% for giving and 10% for saving or investing. Then, with what’s left, decide how much to spend on housing and food and all the rest. By setting aside a healthy percentage for generosity and saving/investing right off the top, that’ll ensure those priorities get taken care of.
At first, direct the 10% saving/investing allocation toward building an emergency fund in a savings account. Once that account has at least three months’ worth of essential living expenses, redirect that 10% to investing.
3 – Take full advantage of the opportunity for free money. It’s alarming how many people take a pass on the free money available to them via an employer match in their 401(k) plan. If your employer offers a match, that’s the easiest money you’ll ever make. Some employers will match your 401(k) plan contributions dollar for dollar up to a certain percentage of your salary—often 6 percent.
In that situation, if you make $5,000 per month and contribute 6 percent, or $300, your employer will contribute $300 more. That’s a guaranteed 100% return on your money! Even if your employer offers a lower match—say 25 or 50 cents on the dollar—that’s still an amazing deal. It’s a guaranteed 25% or 50% return on your money. At very least, try to contribute as much as is necessary in order to receive the full match.
An old comedian once joked, “Youth is wasted on the young.” But he was wrong. Youth is entrusted to the young. Following the three suggestions above will help you make the most of your financial opportunities.
Matt Bell is the author of four Biblical money management books published by NavPress. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.