Thomas is a Finance graduate from the University of Melbourne, Australia. He is an investor in managed funds, ETFs and shares on the ASX200.
It's that time of the month. You have received your paycheck, you paid your bills and you have spent some of your extra money on shopping, drinks, monthly app subscriptions, etc. You still have some leftover money (which is great), but it just sits idly in your savings account. Does this sound familiar to your situation?
Having some savings for an emergency is excellent, but solely relying on those savings from your paychecks to achieve your financial goals is a tall order. Proactively using part of your savings to invest is an important step in being able to earn additional income. It is also important to start investing at a young age.
Here are five simple but strong reasons why you should start investing at a young age.
- You will have more time to learn and recover from your losses.
- You can withstand more risks and potentially earn more from returns.
- You can develop discipline by consistently using extra money for investments.
- You will be able to achieve financial freedom earlier in life.
- You can learn valuable life lessons that will teach you more than just investing. (Spoiler alert: this is arguably the most compelling reason.)
1. Young People Have More Time to Learn and Recover From Losses
Being young is an extremely valuable asset when it comes to investing. At a younger age, you are more receptive to advice and are willing to learn from your own experience. You are also willing to learn from other prominent investors, like Benjamin Graham and Warren Buffett.
As you learn in your investment journey, you will inevitably make some bad or stupid decisions that will result in losses. (Don't worry, even mature investors will make bad decisions every so often.) However, starting young allows you the time to withstand and recover from your losses by changing your investment strategies down the line. Better yet, you will have more time throughout your life to re-invest your earnings on a compounding basis, which translates into more wealth.
To learn more about compound interest, please watch the short video below.
2. Younger Investors Can Withstand More Risks
The older you grow, the more financial commitments you will be burdened with. This includes things like buying a house, raising your kids, forking out medical expenses for sick parents, etc. With each responsibility, your ability to withstand risks becomes lower and lower. What if you lost money in the share market and become unable to pay off your mortgage, or even your basic utilities? Because of this, older people tend to invest more in low risk assets such as fixed deposits and bonds. The risk-return tradeoff theory will tell you that lower risk usually means lower returns.
Being young gives you the advantage of not having to worry about these obligations. It gives you an edge to sustain the volatilities of riskier investments. According to the risk-return tradeoff theory, higher risk is usually linked to higher returns. When those returns are compounded over time, you will be thanking yourself later.
3. Gain Discipline By Consistently Using Extra Money for Investments
I became very interested about investments at the age of 19. During this time, I was still studying and unemployed. Unemployment did not stop me from building my financial knowledge; I took the time to read investment books and make my own notes. As soon as I started my first job, I immediately put a small amount of money away on every payday into some micro-investment platforms. This allowed me to start investing from as little as a dollar. Once it accumulated to a large enough amount, I withdrew some of that money to invest in the share market. The point is that you do not have to wait until you have lots of money to start investing. Channelling a small sum of money each month may not seem like much, but 3, 5, or 10 years down the line, you will be delighted to see that it all adds up to a handsome amount.
Committing yourself to consistently investing a fixed amount of money can also help you stop impulse spending. The next time you are seduced by an email about a tempting sale, you will hopefully realise that you have no extra money to spend. It won't be because you are broke, but because your money will be busy working to make more money. You will also divert your energy and time away from scrolling through product catalogues. Instead, you will become motivated to go out and earn more money so that you can invest it. This is the kind of financial discipline needed to be a successful investor.
4. Achieve Financial Freedom Earlier
If you are relying on the income from your nine to five job to make you financially free, you are likely going to be disappointed.
An interview with 100 millionaires found that nearly two-thirds (62%) of them have multiple sustainable income streams. Many of which are dividends, rents and capital gains from investments in financial securities, properties or businesses. To be more specific, these people did not become financially successful by earning high salaries. They became successful by using their income to invest carefully and responsibly in multiple types of assets. They then reinvested their gains, which generated fortunes in the long term.
It is therefore not surprising that if you invest from an early age, you will eventually find yourself increasingly less reliant on your paycheck to survive. You will be financially prepared to retire or semi-retire at a younger age than most of your peers.
5. You Will Learn Valuable Life Lessons That Teach You More Than Just Investing
This is perhaps the most important reason on this list.
It takes many years of continuous learning to become a good investor. During that time, you will experience a variety of events that will teach you way more than just how to invest. In fact, they may shape your personality and make you a more mature person in general. At a young age, you will be more receptive to such fundamental changes.
You will learn that:
- Patience is key. When there are wild fluctuations in the share market, it is better to just watch and do nothing rather than to do something. You will learn to see things out without panicking. Such experience will shape you into a more rational person rather than one who is driven by animal instinct. Panic selling in a market that is overwhelmingly fearful will almost always result in bloodshed.
- You should never take things for granted. During the good times, you will gain some handsome profits, but shocks happen every so often. Bad events like the COVID-19 pandemic can send the market tumbling down by more than 30% in just days. This is indeed very reflective of a person's life, where you will have many good days punctuated with anomalies of unfortunate events. You need courage to pick yourself up and move forward, because recovery is bound to follow.
These are just some of the many great lessons you will learn. These life-changing experiences will allow you to gain great qualities that are sought after by employers. This is certainly sound advice that you can share with your kids in the future.
The bottom line is that you don't have to be rich to start investing. In fact, it works the other way around - investment leads to wealth.
Of course, you must invest responsibly and take your time. Warren Buffett said that those who build wealth slowly are the ones that come out ahead in the end. Don't expect to get rich quick; that greedy mentality will almost certainly lead to losses in the future. Here is an article that goes into more detail why investing at a young age can be beneficial. If you are looking into getting started in investing, here is an article with some beginner tips.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 Thomas Chan