Until recently, it has been somewhat easy for young people to put off investing. For example:
- With little in the way of financial education, they often don't understand how powerful it can be to start investing early. For instance, if you invest $2,000 at the age of 25 and it has 40 years to grow at an average annual clip of 10%, it will amount to more than $90,000 by the time you retire. That's the sort of return you can get from a simple S&P 500 index fund.
- They tend not to have too much money at their disposal most of the time, so it can be hard to meet the minimum investment requirements for many desirable options. Many well-respected mutual funds require $5,000 or more for an initial investment.
- Then there's the issue of time and interest. With the world as their oyster, many young people find it hard to muster the energy to study companies or funds, and to keep up with their investments.
Making matters worse is the fact that young people are arguably more in need of early investing, because unlike the generations before them, they'll find traditional pensions rather elusive, and Social Security not so secure. They stand to really need a sizable nest egg of their own.
Fortunately, the times are a-changing. There's much reason to be hopeful.
Solutions to obstacles
For one thing, financial education is spreading into many American schools. This is a very good thing, as it is likely to help many young people avoid getting trapped in credit card debt and get them thinking about how to grow their wealth over time. And the education doesn't stop in school. Many banks and other financial institutions are offering educational and planning tools and resources for customers of all ages.
Then there's Wall Street. It has, in recent years, been courting young investors with more determination. For example, many mutual funds have significantly lowered their minimum initial investment amounts.
Tips for the young
So how should young people proceed? Here are a few ideas:
- Get started! Read a book or two on investing, spend time hanging out in Fooldom, talk about investing with friends and elders. Resolve to take action soon, and often. Two Fool books of possible interest are The Motley Fool Investment Guide for Teens (which is also applicable to post-teens) and The Motley Fool Investment Guide.
- If your employer offers a 401(k) fund, take advantage of it -- at least enough so that you're collecting the maximum employer matching funds. Any money your employer chips in is free money -- don't leave it on the table. Whether it's going into your 401(k), IRA, or taxable investment accounts, you should aim at socking away at least 10% of your income, if you can. The more you invest, and the earlier you do so, the better off you're likely to be in the long run.
- Invest appropriately. For your long-term dollars, those whose job it is to grow until you retire, you may want to stick completely with stocks. A 100% stock allocation isn't crazy if your investing time frame is very long. For those funds you'll want to tap within a few years for schooling or a home down payment, invest more conservatively. (Learn more in our Savings Center.)
- Invest automatically. You can often have money regularly and automatically transferred from your bank account to your investment accounts. This can be a great way to keep your investing on track without having to remember to send in checks.
- Don't think that you have to become a total investing geek, giving up your social life to study annual reports. A simple index fund can perform well for you over many years. And if you take time to identify and invest in some top-notch mutual funds, they may deliver even higher returns while requiring little effort on your part.
So no more excuses, young investors. Get out there and invest!
This article was originally published on Aug. 15, 2007. It has been updated.