A Millennials Guide To Investing In Your 20s
A lot of people including millennials are scared of the stock market. There is an inherent fear around investing because of the financial crisis of 2007-2009, and more recently, Brexit.
According to Credit Suisse, for 112 years, stock markets in developed countries on average delivered an annualized rate of return of 8.5%. While many people can fret over the risks associated with the stock market, the numbers don’t lie. Investing in the stock market yields higher returns and ensures that your hard-earned cash is working efficiently and effectively for you.
Investing early can seem scary. The stock market is vast, and the financial jargon can be intimidating. However, doing so will ensure you profit from compounding your returns, meaning you will start to earn more gains and dividends on the money you’ve already earned from the stock market. This compound effect is huge over the course of many decades, and getting started in your twenties locks in the possibility that you will enjoy those returns.
Sounds good. But Can’t I Wait Until I Actually Have a Good Job?
The time to start is now, not in 10 years when you feel you have more money. Let me explain why.
If you feel like you don’t have the means in your budget to start investing, it’s time to make room! Learning to live within your means early on means you’ll avoid taking on an increased debt load and you’ll set up your future self for financial success. Building these habits can take years. Even if you are only starting with a small monthly contribution to your investment account, doing so earlier will benefit you in the long run. Starting early also allows you to build a portfolio while you don’t have a mortgage or kids, both of which are incredibly expensive.
Start now and you’ll have a game-changing advantage to those who waited and are starting to figure it out with all these other complications. Technically, now is when you will have the most disposable income and save the most. Starting now will be easier than starting in 10 years, or when it’s too late…
So how do you start?
To start investing, you want to set aside a portion of your paycheque on a bi-weekly or monthly basis. Aiming for 10-20% is a great baseline for setting yourself up for a grand wealth-building experience.
Tip 1: Make saving automatic
Set up a transfer to your investment account so that you don’t have to even think about moving your money. Another way to think of this is paying yourself first, and it’s the number one rule when it comes to building wealth.
Tip 2: Put it in the right account
Before you purchase your first investment, you need to decide what vehicle to put your money in. For 20-somethings, it’s important to take advantage of tax-advantaged accounts such as tax-free savings accounts (TFSA’s) or Registered Retirement Savings Plans (RRSP’s). Both are great vehicles, but if your income is below $70,000 you should probably focus on maxing out the TFSA.
If you are trying to figure out the difference between the two and which one makes the most sense for you, check out our TFSA vs RRSP infographic.
There are limits to how much you can contribute to each of these accounts. Be careful not to over-contribute, as it will mean you’ll end up paying a hefty tax penalty at the end of the year.
Tip 3: Use low-fee services and investments
Next you’ll need to decide where to invest your money. It’s important to look for a low-fee service or a ‘set it and forget’ approach with low management expense ratios (MER). Fees can add up quickly. Set up your investments through something that is easy to use and understand.
CI Direct Investing happens to be one of those services, using automated investing in low-cost ETFs for you (more on that later). There are also some great self-directed options such as the ‘Canadian Couch Potato’ method if you want to do everything yourself.
Tip 4: Don’t Pick & Choose: Invest in a diversified portfolio
Lastly, you’ll want to decide what to purchase with your money.
If you’re a first-time investor, it’s important to avoid individual stocks, picking and choosing the winners and losers, as they will put you at an increased risk. You also shouldn’t ‘time the market,’ meaning that you guess when the market will go up and down, and buy and sell stocks accordingly. Doing so isn’t that far off from gambling or sports betting, and your emotions can play a large role in making irrational decisions.
Well-diversified funds or exchange-traded funds (ETFs) are a great way to go for new investors, as they decrease risk and keep costs low. Given that the market has seen an average of 8.5% growth in the long run, you should see positive returns if you ‘set it and forget it.’
Tip 5: Just Get Started
At the end of the day, investing earlier is only going to benefit you in the long run. As a 20-something, you have many financial implications, including student loan debt, decreased salary, and high expenses. It’s okay to feel like it’s a long stretch. By making the effort, you’ll reap the rewards years down the road!
If you’re still not sure where to start or want an easy, low-cost way to do so, sign up for CI Direct Investing and you can set up your first automatic deposits easily. You can also chat with one of their advisors for free who can help you create a financial plan.
Janine Rogan is a tax specialist and the blog author of My Pennies, My Thoughts, a Canadian personal finance blog with the aim of helping her readers ‘grow their money tree.’ Follow her on twitter: @apenny4athought