This Is the Number-One Investing Mistake Young Adults Make


Share post:

A smiling person sitting on a couch near a window and holding a cell phone.

Image source: Getty Images

Ask experienced investors what they’d do differently, and this will usually be the answer.

Key points

  • Young adults often wait to invest because they don’t think they have enough money for it.
  • This can significantly reduce your returns, because you won’t earn nearly as much compound interest.
  • You can start investing with any amount of money, and the sooner you do, the better.

For those in their late teens and 20s, it’s natural to make some financial mistakes here and there. Everyone has those bad decisions that we wish we could take back. But there’s one investing mistake young adults make all the time that can cost them quite a bit of money. I did it, many of my friends and family members did it, but you don’t have to do the same.

Don’t wait around to invest

The biggest investing mistake you can make as a young adult is waiting for the right time to invest. Sometimes, people do this because they want to time the market, which rarely works out well. But more often, young adults sit out of the stock market for another reason: They don’t think they have enough money to start properly investing yet.

I’ve been in this position, so I get it. If you aren’t making much money yet and you don’t have much saved, you might feel like there’s no point to investing. What matters isn’t the amount you invest, though. Investing consistently is what’s important.

Even seemingly small amounts of money add up. Let’s say you’re on a tight budget, and $25 per month is the most you can do. That’s still $300 per year, and the great thing about investing is that you’ll earn compound interest on it. Compound interest is when you earn interest on top of the previous interest you’ve already accumulated, instead of just your initial deposit.

Why starting young is so valuable

To demonstrate just how important this is, let’s expand on that previous example. You invest $25 per month and earn 10% per year, which is approximately the average stock market return over the last 50 years. Here’s how your money would grow over time:

Year Balance Contributions Compound interest
10 $5,259 $3,000 $2,259
20 $18,901 $6,000 $12,901
30 $54,283 $9,000 $45,283
40 $146,056 $12,000 $134,056

Source: Author’s calculations.

Over a long time span, compound interest makes a huge difference. And because of how compound interest works, your balance grows more the longer that you invest. That’s why investing while you’re young, regardless of how much you invest, is such a smart habit. When you start early, you give your money more time to grow.

Just consider the difference between each of those 10-year timelines above. If you start investing at say, 20 years old instead of 30, that’s an extra decade of compound interest. That could be worth over $90,000.

Now, we only looked at the results of investing $25 per month. Another reason it’s great to invest early on is because once you get the ball rolling, you’re probably going to want to invest more and more. As you see your balance grow, it motivates you to make more money or adjust your spending so you can put more into your investment account.

How to invest with any amount of money

It used to be costly to invest small amounts of money, but fortunately, that’s not the case anymore. There are plenty of brokers that offer fractional share investing, allowing you to buy smaller slices of expensive stocks. And all the best stock brokers offer commission-free investing, meaning you won’t need to pay fees for each stock trade.

Whether you want to invest $10, $100, or $1,000 per month, here’s how you can get started:

  1. Open an individual brokerage account. For new investors, check out online stock brokers for beginners.
  2. Pick an index fund that invests in a large basket of stocks. Most brokers offer exchange-traded funds (ETFs) and mutual funds for this. These are an easy way to invest, since you get a diversified portfolio without needing to choose stocks yourself.
  3. Buy that investment every month. Set up recurring transfers from your bank account to automate that part of the process, and stick to the same monthly investing schedule.

By the way, there are other ways you can invest instead of with an individual brokerage account. For example, you could also go with an individual retirement account (IRA). This type of account has tax benefits, but you need to wait until you’re 59 1/2 to withdraw from it penalty-free.

Another option, if you work for a company that offers one, is a 401(k). Employers often match 401(k) contributions up to a certain amount. In that case, it’s always a good idea to contribute enough to max out what your employer matches.

If there’s any way you can afford it, invest while you’re young. Investors always wish they had started at a younger age, and I’ve never met one who wishes they had started later. No matter how much you invest, it’s a decision that pays off.

Our best stock brokers for 2022

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers for 2022.

Source link


Please enter your comment!
Please enter your name here

Related articles

New Zealand investing over $2 million a year in game development

New Zealand / Aotearoan game developers will soon benefit from a significant boost to industry funding over...

Playing In Online Casinos: A Beginners Guide

Going to a physical casino certainly has its appeal; you get to experience the hustle and bustle...

15 Biggest Email Service and Account Providers

In this article, we will discuss the 15 Biggest Email Service and Account Providers. You can skip...