Though you can easily find many places to spend money when you first start earning an income, saving and investing in your early adult years will pay off down the road. When choose to research investment options and are disciplined with setting money aside, you will develop a better picture of all your investing options. Starting as young as 20 or earlier helps secure your financial future.
As a young adult, saving for retirement means time is on your side. Most young people can bear higher-risk investments that also could yield higher returns. This is because there is a longer time horizon for your portfolio to rebound if its value declines in the short-term. If you have the time and inclination to choose your own investments, start researching investment basics as well as the companies in which you are considering owning shares. Savings for shorter-term goals such as purchasing a home should be invested in lower-risk investments such as bonds, term deposits or savings accounts.
As a 20-year-old, your investment funds may be limited, keeping you from purchasing stock directly. Instead, you could decide to invest regularly in mutual funds through automatic bank payments, either to your employer's 401(k) plan or personal investment account. A mutual fund pools together contributions from many investors to purchase a variety of investments. Many mutual funds allow you to invest with as little as $500 initially and $50 monthly contributions. Typically investors make their deposits regularly, through automatic deposits. For retirement savings, consider a target-date retirement fund. These professionally managed funds are diversified and rebalanced to become more conservative as your target retirement date approaches.
Compounding and Time
One of the biggest benefits to starting your investments early is time. Compounding is earning income on already earned income, and the longer your money is invested the more opportunity there is for compounding to occur. Keep investing monthly or bi-weekly, even if the amount seems small, and increase your contributions when your income increases. Stay invested for the long term. Instead of withdrawing from your long-term investments for unexpected expenses, start building an emergency savings fund.
Employer Match Plans
When you start your first job, read the fine-print of your employment documentation carefully. If your employer offers a 401(k) match plan, sign up immediately. A match plan allows employees to contribute their own money to a retirement or investment plan, and the employer will match some or all of the employees' contribution, usually limited to a percentage. The match amount may increase based on years of service to reward committed employees. Match plans are an excellent way for young people to boost contributions to long-term investments at a time when cash can be tight.
A former financial adviser with more than a decade of experience in personal finance and small business banking, Sarita Harbour is a professional writer specializing in personal finance, small business, technology, and content marketing techniques. Her writing appears online at sites such as Yahoo! Homes and Bob Vila. Harbour holds a bachelor's degree in psychology and computer science from the University of Guelph and the Personal Financial Planning designation from the Institute of Canadian Bankers.