Financial choices in your 20's: Final Part

Advantages of Investing in Your 20’s

Young adults often face financial challenges due to burdensome student loans, relatively low-paying junior-level positions and a lack of budgeting experience. While those in their 20’s know they are supposed to be saving for retirement, the golden years seem unimportant and a long way off compared to the consumer purchases that could be made now. For many young adults, it seems easier to put off any investing decisions until their financial situation becomes, at least theoretically, more stable. Young adults in their 20’s, however, are actually in a prime position to enter the investing world, even with college debt and low salaries or wages.

Time

While money may be tight, young adults have a time advantage. There is a reason that compounding - the ability to grow an investment by reinvesting the earnings - was referred to by Albert Einstein as "the eighth wonder of the world." The magic of compounding allows investors to generate wealth over time, and requires only two things: the reinvestment of earnings and time. The longer money is put to work, the more wealth it can generate in the future. As your savings grow  you increase capital to enable you diversify your investments from liquid to more fixed assets, e.g. buying a piece of land to develop in future of sell with capital gains.

Take on More Risk

An investor's age influences the amount of risk he or she can withstand. Young people, with years of earning ahead of them, can afford to take on more risk in their investment activities. While individuals reaching retirement years may gravitate towards low-risk or risk-free investments, such as bonds, T-Bills and Money Market Funds, Fixed Deposit Accounts, young adults can build more aggressive portfolios that are subject to more volatility, and that stand to produce larger gains.

Learn by Doing

Young investors have the flexibility and time to study investing and to learn from both successes and failures. Since investing has a fairly lengthy learning curve, young adults are at an advantage because they have years to study the markets, and to refine their investing strategies. As with the increased risk that can be absorbed by younger investors, so too can they overcome investing mistakes, because they have the time needed to recover.

Tech Savvy

The younger generation is a tech savvy one, able to study, research and apply online investing tools and techniques. Online trading platforms provide countless opportunities for both fundamental and technical analysis, as do chat rooms and financial and educational web sites. Technology, including online opportunities, social media and apps, can all contribute to a young investor's knowledge base, experience, confidence and, ultimately, expertise.

Human Capital

Human capital, from an individual's perspective, can be thought of as the present value of all future wages. Since the ability to earn wages is fundamental to investing and saving for retirement, investing in oneself - by earning a degree, receiving on-the-job training or learning advanced skills - is a valuable investment that can have strong returns. Young adults often have many opportunities to increase their ability to earn higher future wages, and taking advantage of these opportunities can be considered one of the many forms of investing.

The Bottom Line

Saving for retirement is not the only reason to make well-planned investments. Many investments, such as those made in dividend stocks, can provide an income stream throughout the life of the investment. Young adults in their 20’s have certain advantages over those who wait to begin investing, including time, the ability to weather increased risk and opportunities to increase future wages.

In the next post, we shall explore making healthy investment decisions.

Financial choices in your 20's: Part 2

Invest or have fun first? That is the question

Continued from part 1

Many youth in their 20’s land their first decent paying job out of college and will do one or all of four things i.e. buy a car, move out of home and/or travel (includes shopping spree) and have fun!

I personally wouldn’t mind doing all the above.

However, saving and investing at a young age has always been one of my dreams. Most young people will not understand the golden opportunities from investing unless they talk to people who have experience in investing and have good knowledge about it.

For example if one invests in a piece of property in during their 20's just imagine how much the value of that property would have increased by the time he or she is in their 30’s! 

A writer at Kenyan Daily post wrote an article of 10 great rules that will help someone remain poor. They include;

1.     Never Wake up early.

2.     Never plan to spend your money.

3.     Don’t think of saving until you have very large amount of money.

4.     Don’t engage in activities usually reserved for the uneducated.

5.     Don’t think of starting your own business until an angel comes from heaven and gives you capital.

6.  Complain about everything except your own attitude: Blame the system, the government and the bank that refuses to lend you money. They are all bad and don’t want you to get rich.

7.    Spend more money than you earn. To achieve this, buy consumer products in credit and keep borrowing from friends and employer.

8.    Compete in dressing; Make sure you wear the latest clothes among all the workers in your office. Whenever your neighbour buys a new phone, get one that is more expensive.

9.     Get yourself a nice second- hand car that costs more than three times your gross monthly pay.

10.   Give your children everything they ask for since you are such a loving parent: They should not struggle for anything because you do not want them to suffer. That way, they will grow up lazy and hence poor enough to ensure they cannot help you in your old age.

Young people are full of energy, potential and excellent ideas. Let us not waste time and start saving and investing now. However, as a young investor, don’t rush to start investing without a plan. It is a good idea to have a mentor who will guide you on this.  Always have a goal, what you want to achieve, then put down a strategy and specific activities to help you achieve it. Definitely challenges will be there but when you have the desire to invest for a brighter future, you will make it.

Orison Swett Marden states that “there is no investment you can make which will pay you as well as the effort to scatter sunshine and good cheer through your establishment”.

We wind up this great post by highlighting five advantages of investing in your 20’s.

Financial choices in your 20's: Part 1

Guest post by Young

For most people in their twenties, the idea of saving and investing seems like a lifetime away. Most people don’t start thinking about saving or investing for future until they are well into their 30's. It is important to realise that the choices you make in your 20's play a critical role in your future financial security. Here are some tips that will help you to build a solid foundation for your future.

Focus on your career

In your 20's, getting established in your career and earning a regular income should top the list of your priorities. This is the time to invest in yourself, to acquire and develop those skills that will enhance your career and boost your earnings. You might have good ideas about becoming an entrepreneur and getting rich, but the discipline of earning regular income from a job and sticking to it for a time, will go a long way in preparing you for lasting financial security.

Acquire financial education

Take deliberate steps to improve your understanding of money matters. There is a plethora of information in the media, books, magazines, newspapers, seminars and the internet that will help guide you as you make decisions.

The first step in financial planning is to identify your goals. Your short-term goals (under five years) might include a wedding, buying a car or taking a vacation. Your medium term goals (five to 10 years) may be to build a house or get a mortgage, whilst your long term goals may be to plan for your retirement and children education.

Live within your means

It is very tempting when you first start earning, and particularly where you have few financial responsibilities, for you to spend excessively on clothes, accessories, new gadgets, mobile phone bills. All these can be a serious drain on your finances at this stage if not carefully considered. Look over your income and monthly expenses. Create a budget so that you can see exactly where your money is going and make adjustments where necessary.

Be cautious about borrowing

It is better to borrow for things that have lasting value such as a home or an education rather than for consumables such as gadgets and clothes. Give yourself a deadline by which time you would have paid off or at least reduced the most expensive debt, usually credit card or store card debt. Pay your bills on time so that you can build a solid credit history from now. This will be important when you need to borrow more significantly in the future.

Pay yourself first

Once your debt is under control, automate your saving. Even if money is tight, try to have atleast 10 percent of your monthly income (all that you receive, be it salary, wage or gifts) transferred to savings or to a mutual fund account through a direct debit. Start small; you will be surprised how quickly this builds up. If you are more aggressive, you can push the savings up to 40% and live on 60%, especially when you are young and single.

In your 20's, you have the luxury of time. Even where you make mistakes, there is time to recover as your investment earnings grow over several years; this means that if you are consistent and disciplined, your savings will be able to grow significantly. Remember too, that this is the time to travel, pick up new skills, and have new experiences before you have larger responsibilities to take care of. Time is on your side; so enjoy it.

Start investing to meet your goals

Historically, the stock market has out-performed other types of investments over the long term, but it comes with some risks. If you don’t own any stock, the market continues to present an opportunity to purchase attractive stocks at decent prices. If you don’t have the time or expertise to select stocks and you have only a small sum of money to invest each month, a stock market mutual fund may be the ideal investment to meet your medium and long-term goals. Better still; put your money in real estate. Buy pieces of land within 20 km of cities or near upcoming towns (County HQRs) and speculate. In Kenya, nothing is paying better than this, and in fact real estate has made young millionaires than any other sector within the last decade. It is only difficult when you have not started, or at least, don't know what you want. But before investing in real estate, due diligence is necessary. 

Seek guidance and wise counsel of a trustworthy person who is already investing in the field you want, be it stocks, money market or real estate. However that does not underscore the importance of your own research and seeking knowledge in the field.

It may seem odd to talk about retirement when you have barely got started with work; naturally you are more concerned about your job and not the end of your working life which is decades away. As soon as you start work, you will be eligible to contribute to a Retirement Savings Account (“RSA”) through your Pension Fund Administrator (“PFA”) You have an edge if you start to invest regularly for retirement from now, and you have a better chance of building a significant nest egg with relatively little effort.

Accommodation is often a challenge. Even if you are fortunate enough to have a free roof over your head provided by your parents or other family members and friends, you can contribute to family expenses on items like utility bills. You can also set aside some of the money that you would have had to use for rent to build up equity towards getting a mortgage so that you can own your own home.

Earn your independence

It is the desire of every parent to ease the path for their children and most children will embrace this gladly. Whilst it’s nice to get a lot of help from your parents, don’t let it get in the way of your attaining financial success. Earn your independence and start to take charge of your financial life. Your parents provided you with an education; now you are no longer a child; your finances are your responsibility.

The habit of managing money is more important than the amount. It is not how much you earn that matters, it is how much you keep. The key to building a solid foundation for future financial security is to have a budget, save, invest regularly, and control your debt. The choices you make now, will largely determine how your life will be in the future.

We shall pick up from here in our next post. Please share a link of this blog to any young adult you know. FE might just be the answer they are looking for to shape their financial future.