Pursuing Education and First Jobs
It’s often difficult to consider investing during the period that most people pursue education, often in their 20’s. Generally, young adults have little income and often have debt associated with their education.
But all financial advisors encourage investing early for two major reasons: (1)
Compound Interest/Returns and (2) Getting into the habit of Investing.
1. Compound Interest/Compound Returns
We have a detailed discussion of compound interest/returns here, but, in brief, the beauty of compound interest is that as each year goes by, the investor earns a return on the initial investment plus the returns that have already been generated (if they remain invested). So a young adult who is able to put away $1,000 for retirement at age 20 will see that investment grow to more than $20,000 by the time they are ready to retire at age 65. That same investment made at age 40 will have also appreciated significantly but only to $5,400 by age 65*. That is why every financial advisor encourages everyone to start investing as early as possible.
*at a 7% return in both cases.
2. Getting into the habit of saving and investing
Like any habit, studies have shown that people who establish good savings habits when they are young, tend to carry those good habits through their whole life. You’ve probably heard of the advice to “Pay Yourself First”. That means you should always set some money aside for saving/investing before you calculate how much you have to spend. So, getting into the habit of saving, even just a little, builds good habits that will last throughout your life.
So, what should you do during your college/university years and when you start that first job?
When you start making money, try to set aside money, even a little bit ($10), each time you are paid. You’ll start building those good investment habits. You can make an investment account or simply start a new bank account for that money. Most financial institutions offer no-fee accounts for young people up to a certain age.
Have fun! You are only young once! And don’t be too worried if you don’t invest anything until you get your first “real” job. Most people don’t and they are just fine.
So, assuming you manage to squirrel away a few dollars each week, where should you invest your money? Assuming we are talking about saving for retirement then we are talking about a very long investment horizon. Said another way, we’d expect the young investor to hold the investments for a long period of time, as much as 40 to 50 years. With that long investment horizon, putting most of your investment in equities (stocks) will lead to the largest returns. It will be difficult to buy individual stocks if you are only investing $5-10/week or month so you’ll likely end up buying a mutual fund. Mutual funds will be discussed more here but in short Mutual Funds buy a large number of individual stocks and/or bonds and then sell the collection of stocks to many individual investors. Investors can the buy these mutual funds and end up with a well-balanced, diversified portfolio. Find out more about your investment horizon and how it influences your choice of investment, click here .
In terms of the investment vehicle for your initial investments, we’ll be covering the primary tax advantaged vehicles in the next section – “Building Your Career.” But in brief, if your first goal is an asset purchase, consider a Tax-Free Savings Account (TFSA). If your goal is more focused on getting a jump-start on retirement investment, go for a Registered Retirement Savings Plan.