Those in your twenties are probably enjoying the greatest freedom you’ll ever know; you may have graduated and moved on to the next stage of your adult life, you’re statistically likely to be gainfully employed, and don’t yet have a mortgage and family to support – but now is the time to plot your course to financial independence.
Student finance is a drag, particularly with the punitive rates of interest that are currently applied, but this decade of your life is one to be carefree before you take on more traditional roles and responsibilities as your parents did before you.
But, with some careful planning, your twenties could offer the chance to set yourself up for life; investing may sound boring, but starting young is easily the best way to get ahead.
As financial self reliance necessarily replaces state provision, many more are starting down the road to financial independence; witness the burgeoning FIRE movement – those seeking Financial Independence, Retired Early; more here
Of course, you don’t have to retire early, but financial independence gives you options, and you will set and achieve financial and personal objectives along the way.
investing may sound boring, but starting young is easily the best way to get ahead
At a more fundamental level, just as social housing has moved from being commonplace to beyond hope for most – how confident do you feel that there will be state pension provision, universal health care or later life care when you come to need it?
That is precisely why an increasing number of people on the side of the Pond are emulating their Stateside cousins and taking personal responsibility for their financial future; the returns you achieve will be down to your level of engagement and diligence – the sense of security and liberation it brings come for free.
So, you’re still young enough to have fun and there will never be a better time to lay a foundation for the lifestyle you hope to have in the future; but, where and how should you get started? Here are some top tips for smarter investing:
1: Start early and unleash the power of compound interest.
In your twenties you may think you have plenty of time to get your financial life together; you could easily live another 60 or 70 years, right?
What difference will it make if you put off investing for a while? Well, as this illustration shows, it can make a world of difference:
If you were to invest £300 per month between the ages of 20 and 60 years old and achieve an 8% return, you would end up with more than £1 million.
Wait until you are 30 to get started and by aged 60, you would have £440,445; even though you only missed £36,000 and ten years of deposits, the first ten years you missed out on would cost you more than £550,000 in returns!
the most powerful force in the universe is compound interest
This is the magic of compound interest, Albert Einstein’s ‘eighth wonder of the world’; earning interest on interest; learn more here
Einstein said ‘the most powerful force in the universe is compound interest’, but its power comes with time – time you’ll squander if you don’t start investing when you’re young.
To be financially free in the future, you have to harness this power and put it to work; fail to and you’ll miss out on gains you can never get back.
2: See money as a means to an end
When seeking to build wealth, instead of thinking of the money you earn as the solution to your problems, think of it as a tool you can use to create the life and lifestyle you want via smarter choices regarding spending, saving and investing.
Becoming a diligent saver and investor in your twenties could be the key to being able to live the life you desire; as an employee you exchange your time for money, but that money can allow you the time you need to do the things you want later in life.
Consider dividing your goals into short-term and long-term pots and choosing investments that will help you reach them; less risky investments or savings may suit short-term objectives such as saving for a house whereas goals with a longer time horizon such as retirement or financial independence, may allow you to invest more aggressively as you have time on your side to ride out fluctuations in the stock market. More about risk here
an investment portfolio capable of achieving your objectives, without keeping you awake at night
The basic rules of risk and return – the higher the risk, the greater the potential returns, but the greater the risk of loss – apply whether you are making individual investments, buying a collective investment such as a fund, or answering questions on an automated investment platform.
Attitude to risk and the emotional response to loss is a very personal thing; the ideal balance gives you an investment portfolio capable of achieving your objectives, without keeping you awake at night.
3: Look at your bigger financial picture
While investing can help anyone in their twenties begin to build wealth, it may not make sense if you are servicing expensive debt such as student finance or credit cards
If you’re spread too thin financially, possibly with a habit of overspending, investing may not be the best choice; before you consider investing it is worth spending some time looking at your overall financial situation – your spending habits, debt, savings, and budgeting.
If interest is being applied to your student loan at 6.1%, you’d have to achieve a return greater than that on your investments just to be in ‘credit’; more about student finance here
4: Increase your savings over time
Whilst your twenties may be a time of liberation and discovery, let’s not pretend it’s anything other than tough to start investing; you may want to buy a home, a car, or to travel the world – where’s the cash to invest?
On the basis that little and often is better than nothing and never, and sooner is better than later, consider starting investing gradually and then increase it over time; this will allow you to save for retirement while also letting you save for other goals along the way.
you should save 20% of your income to be secure in retirement
Most twenty-somethings would say they could afford to save 1% of their income, and increasing that year-on-year by 1% would mean that in your thirties you’ll be putting away 10%, and in your forties, 20% – enough to start to make a significant difference and hopefully you won’t notice because it will be covered by increases in your salary.
As a general rule of thumb you should save 20% of your income to be secure in retirement; by adopting this method you should be able to average that out over time.
6: Invest in yourself.
Regardless of what happens in the stockmarket, or whatever speculative investments such as bitcoin come along, you need to ensure that have a sufficient level of knowledge and understanding to know how to react in any given circumstances to achieve the best outcome for you.
By spending some time on your personal, professional, and financial education you can ensure that you are always in control of your investments; investing in your work ethic, skill set, or wealth of knowledge could be the best investment you’ll ever make.
When you invest in yourself, you simply cannot lose, and there have never been more sources of information, support and social media to help you along; of course continuous learning and personal development can be applied to all aspects of your life, and not just financial literacy – you are the common thread, and the main beneficiary.
5: Keep it personal
We are constantly bombarded with images of what success looks like; the right watch, the perfect smile and the drop-top, drop-dead sports tourer, natch.
Social media delivers a barrage of images of happy people in happy places that you’re missing out on – and everyone knows it.
Unfortunately, this false reality can lead to young people spending money they don’t have, or could put to better use, just for the fear of missing out; the instant gratification of a fortnight in the sun on tick may provide a quick hit, but putting off ‘boring’ stuff like saving and investing for the future, means that things will be all the harder when you do finally take the plunge.
It’s tough when your friends are all jetting off, and you’re the ‘stiff’ seeking solid advice and investing in your future; however, the likelihood is that they will come back with that debt on their credit card whereas by starting early, you may get to go to that self same beach at some stage, and pay in cash.
if it means that your life in the foreseeable future is a drudge, cut yourself a bit of slack
However, this is where it has to be personal; saving and investing may be for you if you are motivated to achieve certain objectives and disciplined enough to do so, but if it means that your life in the foreseeable future is a drudge, cut yourself a bit of slack until it feels right.
Taking an ‘investment holiday’ may mean that you return to the fray refreshed and reminded of the reasons you embarked on an investment regime in the first place.
There are no rights, there are no wrongs; just because certain behaviours deliver a better chance of a successful outcome to an investment strategy, that does not mean that they are right for everybody, and this will evolve over time.
Don’t take too much heed of what others tell you; there is no definitive ‘cost’ of financial independence; it costs the amount you need to have the lifestyle you want without the need to earn additional income, or with an income you can achieve by doing exactly what you want.
7: Automate your investments and spend only the amount of time on them you want to
Muckle is passionate about engaging the next generation of investors in a journey to financial independence; sister site DIY Investor seeks to enable its users to achieve a similar outcome, but with a much more hands on approach to individual investments.
Whether you want to do your own research, buy readymade portfolios, or leave investment decisions to an advisor – fleshy or otherwise – there will be an investment platform that delivers the level of interaction you want at a cost you find acceptable; Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
Your preference may change over time, but no matter where you are on your personal finance journey, one of the best steps you can take is automating your investments so they can take care of themselves; this can be done by setting up regular investments into individual assets you choose via an execution only broker, or allowing an automated investment manager – robo advisor – to take care of you.
Setting up an automated investment plan means that you become accustomed to that money going out each month without having to constantly remind yourself why you should go for delayed rather than instant gratification.
For some, this might be as simple as making additional contributions into their auto-enrolled pension – the contribution your employer makes is as close as you’ll get to ‘free money’, and you should contribute as much as your employer will match.
Others may open an account with one of the many micro-investing or robo advice platforms that give you 24/7/365 oversight of your investments.
It’s a lot easier to build wealth when you’ve made saving and investing a priority instead of an afterthought
Many apps also integrate your banking and savings accounts to give you a holistic view of your finances; some have the ability to project how variations in the amount you invest, your time horizon and the investment return you achieve may have on you likely outcome.
Once you automate your investments, it can be easier to learn to live on less.
It’s a lot easier to build wealth when you’ve made saving and investing a priority instead of an afterthought and if you can get into the habit in your twenties, you may never have to worry about money or retirement savings again.
We would love to hear your experiences and personal stories on the road to financial independence – firstname.lastname@example.org