If you start investing in your 20s it will pay off in the long term. Photo / iStock
Australian finance commentator Ben Nash on three things you need to grow wealth.
Most people know that investing is important, but actually making it happen isn’t easy.
There are so many options it’s overwhelming.
It’s hard to strike the right balance between getting ahead and living a good lifestyle.
And then there’s the fear of making a mistake that will cost you a bunch of money.
The end result is inaction.
When you get stuck in the inaction trap, what it really means is that you’re missing the opportunity to get more money out of what you have today.
You don’t need a lot of money to get started investing. But you do need to get started.
Let me illustrate with an example.
If you leave your 20s with A$5000 in investments, this wealth could grow to be worth A$75,753 by the time you’re age 60.
Or, if you can manage to leave your 20s with A$50,000 in investments, this could grow to be worth A$757,530 by age 60.
But it can get even better – if you could pull together A$100,000 in your twenties, you could sit on this money as it grows to a whopping A$1,515,069 by the time you reach age 60.
These figures are all based on the long term Australian sharemarket return of 8.8 per cent, assuming you reinvest any investment income (dividends) as your money grows.
Pulling together A$100,000 might seem like an almost impossible undertaking for someone coming into their 20s, but when you break it down it becomes much more achievable. Working backwards from the $100,000 target, it takes you saving and investing A$18 per day to hit this number.
For less than the cost of a meal out (or half a lettuce at current prices) you can make A$1.5m. Not bad, right?
This shows the power of time, but also the power of getting started. It’s more common for would-be investors to procrastinate, putting off investing for some magical mythical time in the future where the stars perfectly align.
Sort of like starting a new diet or health kick – next week, next month, after your next pay rise, or after your next holiday – all seem like great times to get started.
But as you can see from the figures above, if you fall into the inaction (or procrastination) trap, the cost is huge.
There are three things you need to get right to make this happen for you.
There are a lot of different ways to invest, but I’m a big fan of passive index fund investing. It’s a little ‘boring’, but the statistics show that index funds perform best over 95 per cent of the time.
Boring is profitable.
Index funds are also easy to understand, because you’re not choosing any one specific company, but instead investing into the overall share market average. It takes a little time to build your understanding here, but once you do you should be able to invest with total confidence.
Have a savings system (or don’t)
I’m a big believer in the power of having a solid budget or savings plan, where you know what money you have coming in and what’s going out, and have your bank accounts structured in a way that makes your day-to-day easier.
I think this is really helpful for anyone, and helps you create good spending habits and importantly drives conscious spending behaviour.
That being said, when you’re really early on in your money journey, if you really don’t want to budget it probably isn’t crucial – so long as you have a couple of important bases covered.
The most critical elements of a good savings system if you’re looking to invest are; setting things up so you can invest consistently, and having emergency funds to fall back on.
Consistency in your investing is critical if you want to actually achieve the results you want. To get here, you need to be clear on the income you have coming in, and ensure you’re going to be able to make your regular daily or weekly investment happen.
Having some money to fall back on when the unexpected happens will mean you’re not forced to sell your investments. This is particularly important because the share market goes up and down over time, and if you’re forced to sell when the market is ‘down’ you’ll be locking in a loss.
This is the final crucial step, and it’s the most common point on the investing journey that people get stuck.
The first step is always the hardest, but once taken you immediately start building momentum and motivation.
Take the time to lay out your plan of attack the right way. Once it’s done, you have to take action and get started. It’s easier to course-correct once you’re moving forward.
You don’t need a lot of money to get started investing, starting small and being consistent will lead to big things. But it won’t just happen on its own …
Start small, be consistent, and celebrate your wins as you progress – this will make it easier to stay on course as you achieve your money milestones and set up your financial future.
– Ben Nash is a finance commentator, podcaster, financial advisor and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck’.
– Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.