Investing At A Young Age

Dec 14, 2020

With the fast-paced life people live nowadays, it’s no surprise that many lose their focus on the essentials. Young adults, in particular, fail to see the importance of investing wisely. 

Deciding to invest early is a decision that would change your life. That is why experts suggest to start considering this even at a young age. Whether you’re a first-time parent or are in your 20s, remember that the decision to invest can affect your life long term.

5 Reasons To Start Investing

It’s easy to instruct and tell someone to invest early. Still, without the proper guidance and evaluation of purpose, individuals may be easily swayed and discontinue investing in the long run. Here are the many reasons why you should start investing:

  1. You Don’t’ Know What The Future Holds

As much as you want to take hold of the future and layout plans, things don’t always turn out the way you envisioned them. As you get older, there is a higher risk of getting into accidents or acquiring diseases. When these occasions happen, you might not be fully ready to shoulder the expenses that come along with it.

Also, giving the burden of paying medical bills to your family is a heavy thing to carry for the rest of your life. All these could have been avoided if you started investing earlier. Don’t wait for accidents or sudden diseases to take over your life and budget. 

2: Financial Mistakes Hurt Less

Investing early is not a 100% guarantee that you won’t stumble upon monetary problems along the way. Whichever path you choose, there’s always a possibility of encountering financial mistakes. However, when you start investing younger, it gives you more room to make mistakes, recover from them, and learn without huge setbacks.

Although people should indeed look at others’ mistakes so that they don’t repeat them, going through difficulties yourself will always be more favorable. Experience is the best teacher, and you should make the most of the learning experience at a young age.

3: It Begins The Path Towards Organized Finances

A common mistake that parents make is that they don’t expose their children to the world of finance, investments, or business due to the fear of them being overwhelmed. The truth is, the earlier they see the importance of managing their finances as a whole, the easier their life will be when they get older.

A child or teen that knows how to invest early might not be the best in the field. Still, it helps hone their skills, mindset, and perception and prepare them for the financial challenges they might encounter as they grow older. However, if your parents did not expose you to the world of investing, it’s never too late to try.

4: Compound Interest Works Better The Earlier You Start

Compound interest is the reason why your money grows exponentially. However, there’s a catch: It only works wonders when you start investing early. Let’s cite an example so that it’s easier to understand. If you start saving 200 a month starting at 20 years old compared to starting at 40 years old, how much difference would it make by the time you reach your senior years?

If you have an 8% interest from age 20 to 60, you get 671,474.50. On the other hand, if you start at age 40, you get 118,615.01. As you can see, investing at 20 years old means that you will get 48,000 more than if you choose to start at 40 years old. But the most significant outcome is that you also have 552,859.49 more thanks to compound interest.

5: It’s The Best Fallback Plan

One of the best examples is getting a retirement plan. Whether you want to reap the benefits of investing or not, overall, it’s still better to have savings that can help you in times of financial perish. You will reap the rewards especially once you reach your later years. While it’s normal for the young generation to view retirement plans as unnecessary, saving small amounts each month can work a similar result

Investment Opportunities For Beginners

  1.  The S&P 500 Index Funds

Compared to interest-bearing investments, the younger generation should focus and concentrate on growth-oriented setups. When you choose the latter, the advantage lies in the compounding of money. Choosing the S&P 500 index means that you get a 10% yearly return, which is an excellent compounding earnings source.

However, take note that the 10% annual return is an average that has changed dramatically over several years. Meaning, you may lose 20% in one year and gain 35% for the next. As mentioned earlier, these are the financial difficulties you might encounter along the way. Starting young gives you more room to make mistakes and recover quickly.

Despite the volatility caused by the recent pandemic, investing in stocks is and always will be a good idea. There’s a high chance of stumbling upon top stocks priced at low rates. Also, this S&P 500 exploration allows you to evaluate the stock market status. Remember to only invest extra money.

  1.  Personal Equity and Retirement Account (PERA)

A PERA plan may not be enticing to do at first, especially for the young investors who want to spend their money on other things and occasions. However, it’s a small price to pay for a very secure future. This type of investment is a retirement plan in the Philippines, with a similar effect to the 401(k) fund in the US.

The PERA plan’s principle is based on a tax-deferred basis, which means that you don’t have to pay any tax for the money you set aside and put in the plan. What you get is a good supplementation against SSS and GSIS pension, which we all know doesn’t amount to much.

  1. Individual Retirement Accounts (IRAs)

For this type of investment, you no longer rely on your workplace or company for it to push through. You can start this plan on your own by opening it in a bank or a brokerage company that permits stock investments, mutual funds, certificate of deposit, or bonds. Also, the fees are lower compared to other investment setups.

Traditional IRA is very similar to the 401(k) plan in the US wherein you set aside an amount that grows tax-free. Once you withdraw the amount, that’s the only time you’ll start paying for taxes. Take note that if your modified adjusted gross income exceeds the threshold, there may be limitations to your traditional IRA. At 59 years old, you may start withdrawing, but there might be a 10% penalty, and by the time you reach 72 years old, required minimum distributions are needed.

When it comes to Roth IRA, you pay for the taxes even before making contributions. However, when the time comes and you want to withdraw the money, there are no additional payments like the traditional IRA. Although there are limitations in the Roth IRA, there is no age limitation regarding withdrawals, and no penalties are imposed.

  1. Real Estate Investment Trusts (REITs)

As mentioned earlier, growth-type investments are an excellent start for the younger generation. Taking the time to invest in REITs allows you to create a commercial real estate portfolio that focuses on different property types in various locations. The diversity of the setup gives you more benefits as compared to getting a single property.

Compared to an investment property that would need a large capital, REIT only needs a few thousand for you to start. Additionally, management of a REIT is not as hectic as managing an investment property. Here are additional benefits of obtaining a real estate investment trust:

  • It remains a valuable hold for young investors despite having returns that are less than that of the S&P 500 index.
  • Real estate proves to be a strong performer for the past few years.
  • Commercial real estate does not rely on the stock market. Meaning, it moves independently of the trends.
  • Your real estate investments may still move positively and rise in value despite stock market discrepancies or volatilities.
  • You get to experience a diverse range of investment growth.
  1. Utilize Robo Advisors

It’s understandable to feel nervous and unsure of investing because of unfamiliarity in the field. However, it’s still possible to start investing through a Robo advisor. The Robo advisor is an automated investment platform that does the job for you. This platform is handy for individuals who are also having difficulties finding a great investment advisor.

The Robo advisor creates the necessities and essentials for starters in the industry: a portfolio. Additionally, the platform also manages and rebalances it periodically. Tax strategies are also part of the system’s plans, which, ultimately, gives you a better chance at obtaining success.

To simplify things, the Robo advisor offers hands-off investing. If you want to dive into the world of investments at a young age without the hassle of planning and managing, then this platform is the perfect tool for you. The primary task is to fund the account, and the Robo advisor will take over from there. 

  1.  Peer-To-Peer Lending

Peer-to-peer lending is popularly known as “crowdfunding,” wherein lending websites act as a bridge between borrowers and investors. Transactions continue and ensue with a fixed rate implemented by the websites. This setup allows anyone to obtain and try for loans directly from other people in the field. The advantage is that these individuals no longer need the financial institution to make it work.

How P2P Lending Works

As an investor, you first visit these P2P lending websites and open an account to deposit money. Then, the loan applicant creates a financial profile that displays information regarding the interest rates to pay. Offers will then be given, and if the loan applicant chooses one, the transactions and transfers remain within the platform. Both parties can haggle, or they may also let the automated process push through on its own.

Advantages of P2P Lending

Peer-to-peer lending is an excellent alternative to the traditional investing ways used by most individuals. However, not many people are familiar with this setup. For starters, it’s best to enumerate the different advantages of engaging in this type of investment.

#1: The Overall Process Is Convenient

Since the platform works mainly online, it also means that the different needed procedures are also accomplished online. This advantage is excellent for individuals who want fast and convenient results without worries. A P2P website also uses a system that allows a faster turnaround time for your money since the matching process is programmed to be very quick.

#2: Lower Rates Are Available

Unlike traditional investing, loans with P2P lending are generally lower, which gives you a better chance of finding something suitable. Also, this setup benefits both parties, not just the investor alone.

#3: Traditional Lenders Are Also Welcome

While it’s true that old habits die hard, traditional lenders also have a place in the P2P world. Some alternatives can be used, which also caters to their investing preferences. The beauty of trying a platform that changes along with society is that there are numerous flexible options available.

Final Word

As a first time investor, it may be challenging to decide which setup or plan you want to take. However, it’s still best to venture into these things. At the same time, you’re young, so that you can afford to make financial mistakes and still rise without causing too much damage to your pocket and savings.

Explore, the Philippines’ leading P2P platform registered and accredited by SEC. Creating an investor account is so easy – you don’t have to leave your home, we do everything online! Make the right decisions as early as now and give yourself the financial security that you deserve.