How To Invest Profitably In Your 20s And Retire Early!
1. Start an Emergency Fund(EF)
An emergency fund is an amount set aside for use when you
encounter an unforeseen calamity like an accident, an unexpected loss of your
money.
An emergency fund will ensure you are covered if an
unexpected problem or hiccup arise, for example, job loss or natural disaster-
you will also have to replenish the account regularly
Now you might be asking, How Much??
The answer to that question is rather straight forward,
mathematically speaking, 20% to 30% of your income will be enough but you might
fail to fork out that much regularly, so what now? You have to set
aside money that will not be emotionally stressful to you, I call it “a sleeping
percentage” which just means take out the amount that enables you to sleep
peacefully at night.
$100 may work for a start and continue contributing to your
find and observe how it goes adjusting along the way.
An emergency fund is a solid foundation in financial
planning and you need to build from one in your 20s if you have a strong desire
to be financially independent in your old age.
2. Start Investing Longterm
“Always Invest for the longterm”- Warren Buffet
Start saving in your 20s and invest in longterm as well as
short-term for your day to day needs and expenses.
“The single greatest edge an investor can have is a longterm orientation”- Seth Klarman
Do remember to use different accounts in doing this.
Personally, my accounts I use for short term wants like going
out on a Friday night are different from my long term goals like retirement
Please also note that investing and saving is by n means
the same, investing is risky- you expect a higher return on your capital-while
saving you are expecting a smaller interest on your capital most times an
inflation adjustment
3. Start an IRA
IRA means individual retirement account and there are two
typoes of these- a traditional IRA and a
ROTH IRA, here at moneychaps encourage a Roth IRA over a traditional IRA because as young people you are more
likely to be in a lower tax bracket than you will be when you retire.
The money you deposit in a ROTH has already been taxed, you
pay no taxes when you get your money at age 50 and a half.
“I love a Roth IRA. Tax-free income in retirement is truly great deal”- Suze Orman- an American finance advisor and a personal finance expert.
Most young people seldom think about opening a retirement
account, but brother, old age is inevitable and you gotta be ready!
Investors younger than 50 are allowed to contribute up to
$6000 in 2020.
4. Keep Short Term Savings
As your emergency fund, start saving for the short run, you
may need money to use hence the need to keep it where you might easily access
it
“If you need money in a couple years, then it shouldn’t be invested in the stock market. It should be invested in those more secure vehicles like money market where, yes, you might be giving up some potential growth, but its more important to have the return of your money than the return on your money”- Menke
“Cash in savings accounts, short term CDs or money market deposits is great for an emergency fund. But to fulfill a longterm investment goal like funding your retirement, consider buying stocks. The more distant your financial target, the longer inflation will grow at the purchasing power of your money”- Suze Orman
5. Create A Budget
It is the basis of all personal financial planning and you
should have one.
60% of the US people shockingly opt not to create one.
Without a budget, you are gonna find a tough time navigating through your
expenses and incomes- cash inflows and outflows.
You will also fail to identify key investment opportunities,
it's simple really, open your spreadsheet and enter your cash inflows(assets)
against your cash outflows(liabilities) and compare how your cash is being
utilized.
Please don’t confuse the assets and liabilities here with those
‘accounting’ assets and liabilities
Assets here in personal finance refer to your equipment or
businesses that give you money and liabilities are the equipment and business
that siphon money from you every month/year.
6. Improve Your Skills
Investing in one’s self is the most underrated key
investment area in the world of personal finance.
Don’t ignore or downplay getting more knowledge in your
industry by learning from the greats in your industry and by reading a lot of
material. Reading will change you in ways you could not imagine in your wildest
dreams.
The money you get in a lifetime is a direct derivative of
what investments you did in your 20s and early 30s.
Learn money-making skills above all!
7. Pay off Debt
One of the greatest complications of investments for young
people is the lack of money and debt.
Pay off your student debt, especially your student loan debt,
Debt reduces your cash flow, in a perfect world, no one will
be languishing in debt, but our world is
far from perfect, and you probably have some debt and you need to pay it off!
If you have debt, find a balance if you want to invest, make
your minimum debt installments and throw everything in your investments.
Making money in your 20s is one of the best feelings in the
world.
8. Get a Robo Advisor
If you want to invest longterm in stocks, you might need to
get a Robo-advisor especially if you are a complete beginner.
Robo-advisors are an electronic online, automated
investment platform that does all you’re the investments for you.
It includes creating and managing your portfolio and
periodically rebalance your investments by reinvesting your dividends.
Here at moneychaps, we recommend you use wealthfront- which
offer an incredible range of investment benefits and are on the cutting edge of
industry
You can also check on other available advisors out there.
9. Diversification Of Your Investments
Invest in stocks of different size companies and firms in
different sectors or industries around the world
Diversification reduces risk by allocating investments that
will react differently to the same event
For example, investing in the technology sector like apple
and consumer focusing firms like coca-cola may help you in the long run, don’t
put all your money in startups or you might end up like most did in the 1990s
during the ‘dot com’ boom.
“Diversification is an established tenant of conservative investment”- Benjamin Graham
10. Make Risk Your Buddy!
Do not be afraid to take risks in your 20s, mostly because
you have nothing or little to lose than when you are in your 40s or more.
In
your 20s you probably don't have a family, home or a car and that makes it easy
to risk and not be afraid to start over when you fail.
Steve Jobs said,” The greatest artists like Dylan, Picasso risked failure and if we want to be great, we have got to risk it too”
“The biggest risk is not taking any risk- in a world that’s changing really quickly the only strategy that’s is guaranteed to fail is not taking risks”- Mark Zuckerberg
Now that it's clear how you can invest for your future, its time to go back and do the necessary work needed for you to make it in this dynamic world and probably feel better about yourself!
Tell us how you are investing in 2020 in the comment box down below.
