The million-dollar benefit of investing in your 20s

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The key to earning big is investing early on in life. (Source: Getty)

Avoiding investing in your 20s could potentially see you missing out on million-dollar benefits.

It is most certainly intimidating to start investing at a young age, especially if you have limited funds and are just starting out in your career.

However, the earlier you start investing, the more time you have to grow your wealth and take advantage of compound interest and build out your nest egg.

As a 22-year-old entrepreneur, I’m fortunately surrounded by experienced mentors and high-net-worth individuals that cut down my financial learning curve.

Unfortunately for most, schools or universities never successfully manage to educate us on topics like investing. It turns out it’s quite relevant to people my age.

Here are the three main reasons anyone in their 20s should start investing.

1. Screwing up is less risky

One of the immediate, main benefits of starting young is that you simply have a longer time horizon.

This means you have more time to iron out the ups and downs of the market and hold onto your investments for the long term. As a result, you can take on more risk in your portfolio, which has the potential to lead to higher returns.

Tony Kynaston, host of the QAV podcast and a seasoned investor – averaging a 19.5 per cent return on his portfolio over the past 20 years – had this to say on investing young.

“I tell every young person I know that the best time to develop the habit of investing is when you are young because you’ll maximise the benefit of compounding, potentially enabling you to retire early.”

2. Unexpected financial goals

Life goes by fast and, before you know it, you’ll start thinking about buying a house, having that sporadic holiday, or saving for your child’s education.

By starting to invest early, you can take advantage of compound interest and potentially have a larger sum of money saved for these goals.

To visualise compound interest better, The Snowball, a biography on Warren Buffett, gets its name from an analogy where the longer you roll a snowball down the side of a mountain, the bigger it gets.

This can also be said of investing long-term.

3. Doing the maths

One of the keys to successful investing is diversification, which means not putting all of your eggs in one basket, which can help to mitigate risks.

In your 20s, you have the opportunity to build a diverse portfolio that includes a mix of assets such as stocks and real estate.

Australian index funds return an average of 10 per cent per year and that’s factoring in years where there are financial crashes etc. The real key to winning is staying in the market for the long term.

If you’re a 20-year-old and are able to invest just $800 per month into a stable index fund, using a simple compound interest calculator, by the time you hit retirement age (60), you will have amassed more than $4 million.

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