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 received your pay check, paid your bills and spent some of the extra money on shopping, drinks, monthly app subscriptions etc. You ended up having some leftover money (which is great!) but they just stay idle in your savings account. Sounds familiar?
Having a pool of money for emergency is excellent, but relying solely on savings from your pay checks to achieve your financial goals is a tall order. Proactively using part of your savings to invest and doing so from a young age becomes extremely important to give yourself a long runway to earn additional income.
Here are 5 simple but strong reasons why you should start investing from a young age:
- Young people have more time to learn and recover from losses
- Younger investors can withstand more risks, and potentially more returns
- Build Financial Discipline through consistently channelling extra money to investments
- Achieve financial freedom earlier
- You will learn valuable life lessons that teach you more than just investing (spoiler alert: this is arguably the most compelling of all reasons)
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, willing to learn from your own experience and that of other prominent investors such as Benjamin Graham and Warren Buffett, just to name a few.
As you learn by doing in your investment journey, you will unavoidably make some bad or stupid decisions (don't worry, even mature investors will make such decisions every so often) which result in losses. However, starting young allows you the time to withstand and recover from the losses by changing your investment strategies down the track. Better still, 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 (hence more returns)
The older you grow, the more financial commitments you will be burdened with - buying a house, raising your kids, forking out medical expenses for sick parents etc. With every addition of these responsibilities, your appetite to withstand risks becomes lower and lower, because what if you lost money in the share market and become unable to pay off your mortgage? or even pay your water bills? Hence, older people tend to invest more in low risk assets such as fixed deposits and bonds, but the risk-return tradeoff theory will tell you that lower risk usually means lower returns.
Being young gives you the advantage to NOT have to worry about these obligations. It gives you an edge to sustain the volatilities of riskier investments and again, citing the risk-return tradeoff theory, higher risk is usually linked to higher returns, and combine that with compounding effect - you will thank yourself later.
3. Build Financial Discipline through consistently channelling extra money to investments
I have become very interested about investments at the age of 19, during which time I was still studying and unemployed. Unemployment did not stop me from building my knowledge base by reading investment books and making my own notes. As soon as I started my first job, I immediately put a small amount of money away on every pay day into some micro-investment platforms that allows me to start investing from as little as a dollar, once it accumulated to a large enough amount, I withdrew some of the money to invest in the share market. The point is, 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 much, but 3, 5, or 10 years down the track, you will be delighted that they all add up to a handsome amount.
Committing yourself to invest a fixed amount of money consistently can also be your solution to stop impulse spending. The next time you are seduced by an email newsletter about a tempting sale, you will hopefully realise that you have no extra money to spend not because you are broke, but because your money are busy working to make more money. You also divert your energy and time away from scrolling through product catalogues and instead, become motivated to go out and earn more money so that you can invest them (Tadaa!! There comes discipline!).
4. Achieve financial freedom earlier
If you are relying on income from your 9 to 5 job to make you financially free, the likelihood is that you will be disappointed.
An interview with a hundred 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 became financially successful not exactly because they earn high salaries, but rather, because they know how to leverage on their day job income by investing carefully and responsibly in multiple types of assets, and then reinvesting their gains, hence generating 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 pay check to survive, and better still, 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 of all five reasons.
It takes many hours and years of continuous learning to become a good investor, and over the course, you will experience a variety of events that teach you way more than just how to invest. In fact, they shape your personality and make you a more mature person in general. At a young age, you will be much more receptive to such fundamental changes.
You will, among others, learn that:
- patience is key. Often 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, and bad ones 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 countless of better 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 experience allow you to gain great qualities that are sought after by employers, and are certainly sound advice you can share with your kids as part of your parenting in the future.
The bottom line? You don't have to be rich to start investing. In fact, it works quite 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 because that greedy mentality will almost certainly lead to just the reverse outcome.
This article also explains why investing young is worth the trouble
- Bill Ackman says mandatory investing accounts for every US child could combat wealth inequality | Bu
US could combat the disparity with mandatory investing accounts for every US-born child, Ackman said. If returns continue to average 8% per year, a $US6,750 investment at birth would yield more than $US1 million at retirement.
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