Your 20s can be an exciting and transformative phase of life. It’s a time of newfound independence, exploration, and self-discovery. And making investing a priority as a young adult is one of the best things you can do for your future self. Though investing might seem intimidating, it can significantly impact your financial well-being in the long run. In this article, we explore why investing in your 20s is important, the benefits it offers, and some tips to help you get started.
Educate Yourself
Investing can be complex so it’s important to educate yourself about different investment options, risk tolerance, and personal finance. Take the time to research potential investments but be careful when doing research online – there’s an abundance of incorrect and biased information. If you’re feeling overwhelmed, you can seek advice from a registered investment professional. Your provincial securities regulator (that’s us!) also offers a free resource to help you learn the fundamentals of investing called Get Started with Investing.
Knowledge is power when it comes to making informed investment decisions.
Pay Off High-Interest Debts and Build an Emergency Fund
Debt plays a big role in your financial position. While investing is important, it’s equally vital to manage debt responsibly. High-interest debts, such as credit card balances, are a significant drain on your finances. But not all debt is bad. Consider the debt you have, and the debt you may take on in the future, and how it will affect your financial goals and ability to invest.
Learn more about debt management.
Building an emergency fund is equally as important as paying off high-interest debt before you start investing. An emergency fund can help you pay unexpected expenses and avoid taking on high-interest debt. An emergency fund is typically kept in a bank account that can be easily accessible if needed. This may be for car repairs, family emergencies, job loss, or extended illness. Your emergency fund should typically cover three to six months of expenses.
Start Small and Be Consistent
You don’t need to be rich to invest. Many investment platforms (we get more into this below where we talk about how to manage your money) allow you to start small. Consistency is key, so even if it feels like a small amount, make it a habit to set aside a portion of your income each month for investing. Small, regular contributions accumulate over time – and when you’re older, you’ll be glad you started in your 20s.
Although you don’t need a large sum of money to start investing, you do need to be aware of the risks that can come with investing. All investments come with risk. Generally, the higher the potential return an investment might offer, the higher the risk; and when you take on greater investment risk, there’s no guarantee you will actually get a higher return. So it’s important to consider the risks involved, as well as how much or how little risk you’re prepared to take with your money.
Watch this video to learn about investment risk and return.
Capitalize on Time and Compounding
The most significant advantage of investing in your 20s is the magic of compounding. Compounding refers to the process of earning returns on your initial investment and any accumulated interest from previous periods. By starting in your 20s, your investments have more time to grow, thereby increasing potential returns.
Embrace Risk and Long-Term Thinking
In your 20s, you have an option that others may not: taking on more risk with your investments because of your longer time horizon. This means you can ride out market fluctuations and capitalize on opportunities like stocks and equity investments. However, embracing risk doesn’t mean being reckless; it means being informed and strategic about your choices. It’s also a time when you can experiment with different investment vehicles (like exchange-traded funds (ETFs), mutual funds, stocks, and bonds) and learn from your experiences, thereby helping you make wiser decisions in the future.
Diversification is Key
One way to reduce the risk of your investment portfolio is diversification. It involves spreading your investments across different asset classes like stocks, bonds, mutual funds, and more. Diversification doesn’t necessarily make you more money or stop you from losing money; it simply means not putting all of your eggs in one basket. By diversifying, you reduce the impact of any single investment’s poor performance on your overall portfolio.
Watch this video to learn more about diversification and asset mix.
It’s Never Too Early to Plan for Retirement
Retirement can feel like a distant concept, but starting to save for it in your 20s can significantly impact your financial situation later in life. Saving early means your money will have more time to earn income or gains on the earnings you make when investing (think back to when we talked about compounding). Try our Retirement Calculator to see how investing early can impact your retirement.
Consider taking advantage of retirement savings accounts, like the Registered Retirement Savings Plan (RRSP), or employer-sponsored retirement plans, especially if your company offers a matching contribution.
Read about how to kick off retirement planning.
You Have Options with How You Manage Your Money
Investing looks different for everyone. Most people manage investments in one of three ways: working with a registered investment professional, using a robo-advisor, or doing it yourself through self-directed investing.
If you need help or want support in choosing investments, a registered investment professional can work with you to achieve your goals. Watch this video to learn about working with an investment advisor.
Robo-advisors use technology and algorithms in an effort to lower costs and remove the need for direct human contact. Self-directed investing means investors manage their own investment portfolios. They decide which investments to buy and sell, and when. Typically, they make trades using discount brokers and online trading platforms.
Watch this video to learn more about robo-advising and self-directed investing.
Investing in your 20s can be a powerful tool for building long-term financial security and achieving your goals. By prioritizing investing in your 20s, you can take advantage of time and compounding to grow your wealth substantially. Remember to balance investing with debt management and an emergency fund, and continue learning about investing in order to make informed decisions. As you embark on your investment journey, keep your long-term objectives in mind and be patient. Successful investing is a marathon, not a sprint.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at 604-899-6854 or 1-800-373-6393, or through email at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.
InvestRight.org is the BC Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.
