The twenty-something investor: Why you need to start young

The world is your oyster when you’re in your twenties.

This is the time in your life for change, growth, and experimentation. This is where you make your biggest mistakes and learn many of life’s greatest lessons. You graduate from college, move out of your parents’ home, and become a full-fledged, independent adult. You get your first job, earn your first salary, and actually take control of your own finances.

Hence, it’s also the best time to start investing in the stock market.

Investments are probably the furthest in your mind when you’re young. After all, it’s also the time for having fun, going out on parties and road trips, and generally just having a good time—all of which entail enjoying your hard-earned money. But good financial habits should start when you’re young, as a flippant approach to personal finance could cost you a lot more down the road. Setting aside a portion of your income every month for stock market investing can go a long way, especially if you take the power of compound interest in consideration.

Investing may not be the foremost thing on our minds in our twenties. (Source)

What is compound interest?

According to Investopedia, compound interest can be regarded as “interest on interest,” as it makes your capital grow at a faster rate than simple, one-time interest.

For instance, if you invest 1,000 and gain 10 percent compound interest per year, you’ll have 1,100 after the first year. It’s even better the second year because you’ll earn 110 in interest, as that is 10 percent of 1,100. You earn interest on your principal and any interest that you accrued so far. Hence, you’ll earn more and more interest per year.

That’s why the younger you start investing, the more you can reap the benefits of compounding interest and long-term market gains. You’ve probably heard stock market success stories in which an investor puts money in a good stock, forgets about it, and receives millions out of it after 30 years. It’s all because of compounding interest.

Taking Advantage of Compounding Interest

So when is the best time to invest in the stock market? As soon as you start earning an income. But if you’re already past your 20s, don’t worry because there are still some things that you can do to leverage the power of compounding interest.

1. Start now. The critical thing to remember here is that time is of utmost importance. Hence, the second best time to invest in the stock market is now. You can find a lot of online resources regarding stock market investing, but a good way to start is by downloading a finance news app.
2. Invest in a blue chip stock. It’s not enough to just leave your money in one stock and forget about it. You have to invest in a blue chip stock—a company that has a reputation for quality, reliability, and ability to operate profitably in good times and bad. This company should be able to withstand market downturns and recessions, so when you entrust your money to the company in the long term, you’re sure that it’s in good hands.
3. Be consistent. Set a monthly target for investing. Many financial planners recommend putting 20 percent of your monthly income in investments, but it really depends on how much you’re earning and your personal goals and circumstances. The important thing is to keep at it monthly until you reach your investment goal.

Time is gold in the stock market. If you have the means and knowledge to invest in it while you’re still in your 20s, don’t miss the opportunity to do so.