According to Yahoo Finance, 43% of millennials aren’t investing because they don’t know how
Everyone talks about investing while you’re in your early twenties but what does that really look like? For starters, there’s a false perception that investing is difficult, the purpose of this post is to DEBUNK that myth.
One of the reasons you feel hesitant about investing is because you never learnt about it in school; your parents likely never spoke about personal finances in your household. To make matters worse, our education system includes no financial education, it’s about time we changed that. Personal finance may seem daunting but just like any subject matter, you learn it gradually. Finance professionals making a living by providing you guidance and they can help you learn everything from investing, to getting out of debt, and even building a simple budget. Reading this post is your first step to building a healthy financial life.
Drumroll please…”what is investing?” They say that saving your money, is putting your money to rest, well in that case, you can look at investing as putting your money to work.
Is your money working as hard as it possibly can for you? Or are you working harder for it?
For starters, any time you invest you’re purchasing an asset with a goal of obtaining future interest from it. There’s two forms of investing, active and passive. With active investing, the objective is to try and out-beat the stock market’s average returns while taking full advantage of short term fluctuations. Active investing involves a portfolio manager who’s responsible for buying and selling. With passive investing, you’re limiting the amount of buying and selling in your portfolio; this strategy involves a buy and hold tactic which is cost effective and it demonstrates that you’re investing for the long haul.
At this point you’re probably wondering why you should start today as opposed to later.
I’ve listed 3 reasons below:
- Inflation – Erodes a consumer’s buying power meaning the value of our dollar wont go quite as far as it did before. It’s the gradual rise in prices and decline in purchasing power over time. The average inflation rate ranges from 2-3% so if you leave a large lump sum in a savings account it’s actually losing value over time. High yield savings accounts are no better. For example, if you have $20,000 sitting in a savings account and the account pays out 2% in interest, at the end of the year you would have only earned $400 in interest, to make matters worse you’d pay taxes on this. To put it simply, you need to earn at least 3% to break even and not lose buying power. The only way to do this is by INVESTING!
- Time – Time allows us to take risks, generally speaking, the greater the risk the potential for a higher return. This is because investors that have more time to recover if something were to go wrong have the opportunity to make riskier moves. If you wait longer to start investing then you’ll be more cautious on how you’re investing your money.
- Compound Interest – This is when you earn interest on interest, by continuously reinvesting your earnings you’re increasing the return on your investment. To illustrate the magic of compound interest, I’ll provide an example: Jasmine at 25 starts investing $200 per month, assuming a 6% return, she’d have $393,700 saved by 65 when she’s ready to retire. In comparison, Jack waited until 35 to start saving for retirement, he also put $200 aside per month, with the same rate of return he only ends up with $201,100 at 65. Jasmine has $192,600 more than Jack, simply because she made the decision to start investing sooner. Moral of the story: don’t be a Jack — be a Jasmine!
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