Suze Orman Says the Key to True Financial Freedom Starts When You're in Your 20s. Here's Why

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  • Many people don't think long-term when they're first learning to tackle adulthood.
  • Beginning to invest in your 20s could set you up for a lifetime of financial success.
  • You'll have longer to earn compounded returns on your investments.

Be sure to take advantage of this crucial decade.

Many people spend their 20s saving money to buy a home and trying to work their way out of debt. And because 20-somethings are, by nature, new to the workforce, they often don't earn the highest salaries.

That's why a lot of people in their 20s don't focus on investing -- they have other priorities to think about, and understandably so. But if your goal is to attain financial freedom and security, then Suze Orman insists that it's important to take advantage of your 20s -- and start investing then.

Don't pass up a key opportunity

When you're first starting out in your career and your earnings are limited, it can be difficult to eke out money to invest in a brokerage account or IRA. But on a recent podcast episode, Suze Orman made a point to talk about why 20-somethings should make an effort to invest.

Specifically, Orman said, "It is so important in my opinion that we all become what I call the ultimate savers and investors. And I have to say that one of the best ways to do that is to start saving and investing more at an early age than you do even at a later age. Because of compounding."

"The key to true financial independence and freedom starts when you are in your 20s, when you are in your 30s. Because every dollar that you invest gets to earn money. Then the earnings of that money gets to earn money. And then over all the years, your money compounds. And you will have more and more money."

Orman is totally spot-on. Let's say you invest $1,000 in your 20s. After a year, the $1,000 in your IRA or brokerage account balance might grow to $1,050. But then the next year, you're not just earning a return on your initial $1,000 investment. Rather, you're getting to invest your $1,050 and earn a return on that sum. So all told, through the years, the more your portfolio balance grows, the more money you have to invest and earn money on.

In fact, let's say you assemble a portfolio of stocks or exchange-traded funds that delivers an average yearly 8% return, which is a bit below the stock market's long-term average. If you invest $10,000 at age 25, by age 65, you'll end up with about $217,000, even if you don't put another dime of your own money into your brokerage account or IRA during those 40 years. Rather, that $207,000 gain will come as a result of compounded returns.

But watch what happens if you wait 10 years to make that $10,000 investment. At that point, you'll be looking at around $101,000 after 40 years. Now, that still means you're walking away with 10 times your initial investment, so that's not a bad deal. But it's not the same gain you would've enjoyed had you started investing in your 20s.

Advice worth taking

Even if money is tight in your 20s, it still pays to do what you can to allocate some cash to investing. And it doesn't have to be a lot. You can invest $100 your first year if that's all you can manage. But that way, you'll at least start putting your money to work so you can take advantage of the power of compounding. And that could lead to a world of financial freedom down the line.

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