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Best Way to Save Money in Your 20’s

Unfortunately, at times, it may seem as if money is the center of the universe. Indeed, in our experience, this seems to be more accurate, the closer you are to bankruptcy. Nevertheless, most people overcome adverse circumstances. By following some important advice, you can avoid them entirely. Have you begun to save money? If not, have you thought about how important it could be? Suppose you are to have an accident. Then, could you afford to take care of everything without going into debt? Plenty of people around the world could not if they were in those shoes.

We have found saving money is more palatable if you reframe it. Instead of socking money away into a savings account, you should invest it. That way, your hard work continues to earn additional revenue into the future. With the right investment strategy, you could even retire early. Nevertheless, you’ve got to get started if you’re going to make this dream a reality.

The Fundamentals of Investing in Your 20s

Often, procrastination is the result of ignorance. Of course, we do not mean this in any disparaging way. We mean the simple lack of knowledge. Anytime someone introduces themselves to a new field, they are a beginner. This is an unavoidable fact. However, too many people allow this to hold them back. Instead of delving in, they avoid that uncomfortable feeling. Just remember, everyone has to start somewhere. Unless you plan on avoiding it your all life, it would be better to get it over with now.

Key Insights

  • Returns Are Exponential. So, an Early Start Is Vital
  • There Is No Such Thing As Too Soon to Begin
  • Learning the Fundamentals Should Be Your First Step

Understand Your Employer Benefits

In our experience, we have found it is easiest to get started with the benefits offered by your employer. Typically, you’ll even have an entire HR department who will be willing to explain them to you. As you learn about these benefits, you’ll develop an understanding of key terminology. This will be applicable in other areas of finance.

401(K):

To begin with, check to see if your employer offers a company match to your 401(k). If so, ensure you are taking advantage of it. Otherwise, you are leaving free money on the table. When an employer offers to match, they deposit additional money into the 401(k) account. However, a certain percentage of your paycheck must be deposited into the account as well.

Eventually, you will become vested with the account.

At that point, everything within the account becomes yours. Most of the time, there will be penalties if you decide to withdraw early. However, these will vary depending on the employer and specific regulations.

Related:  Definition of a 401k plan.

Healthcare Benefits:

How often do you go to the doctor? Are you paying for healthcare benefits at work? If so, you should evaluate whether you need your current plan. In many instances, people overpay for healthcare. Even when the employer subsidizes it, you still pay for much of it out of your paycheck.

If you do not need to go to the doctor often, you might be better off with a more affordable plan. Then, you could invest the money that you saved by choosing a more affordable coverage option.

The Importance of Beginning to Invest Early

Throughout our lives, we’ve often heard tales of powerful forces. One such example might be a typhoon. While most go through life without a similar encounter, compound interest is unavoidable. Either you take advantage of it, or it takes advantage of you.

Compound Interest Works in Your Favor:

  • Credit cards are a great example of compound interest working against you. Every month you make your payments. Yet, it doesn’t seem like the balance goes down all that much. Well, this is because most of your payment only applies towards the interest. Unless you pay above the minimum, the balances will hardly reduce.

On the other hand, compound interest can also work in your favor. For example, suppose you invest your money in an account that generates an 8% return. After a few decades, that account would have appreciated by over 1000%. Therefore, even a small investment would be worth a substantial sum in the end.

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The Sooner You Start, the Earlier You Can Retire:

  • If you want compound interest to work in your favor, it will behoove you to start as early as possible. The sooner you begin, the more powerful this force becomes. By the time you reach retirement age, you could be a millionaire without even sweating it.

Risk Management for Investing During Early Adulthood

Of course, it would pay off to avoid becoming overzealous. Often, young investors lose everything. Why? Typically, it’s because they did not manage their risk. When you invest something, you need to ensure that you hedge. Otherwise, you could also become a casualty. The most promising returns are not worth losing your entire portfolio.

Trust us.

It would be better for you to learn this now without having to learn it the hard way.

An Eye on the Long-term

As an investor, you will develop an understanding of market tendencies. Most of the time, things will follow a general trend line. Nevertheless, there are occasional reverses. In those instances, you must know how to capitalize. If you do not, you will miss out on your moment. Meanwhile, you need to manage your risks. That way, you do not lose out on your existing capital.

What Is Risk Management?:

  • Risk management means many different things to different people. To us, it is any strategy designed to hedge your investment portfolio. If the market were to take a downturn in a certain sector, you should have other investments. These should be positioned to increase. Thus, they will act as a counterbalance to your riskier assets.

How Do You Manage Risk?:

  • Usually, we recommend building a diverse portfolio. When you have a portfolio, it’s only as resilient as it is diverse. Since the economy is so interconnected, everything affects everything. Therefore, if something goes down, other things go up. Thus, a diverse portfolio protects you against potential downsides.

A Properly Diversified Portfolio

How would you go about building a properly diverse portfolio? Well, it’s impossible to give a blanket recommendation. Depending on your goals, you will have different risk tolerances. Nevertheless, we recommend having at least a stake in all of the following asset classes. As long as you have some of them all, you should be more or less insulated from most market disturbances.

A Few Potential Asset Classes

  1. Stocks: These represent ownership in a particular company. They have a long history. Companies have been using them to finance activities since the time of the colonies. Today, these are the most popular asset class worldwide. We recommend getting a few high dividend stocks. These are regular payments to investors throughout the year. Thus, it represents a great way to build passive income.
  2. Bonds: These represent debts. Typically, they are owned by either a company or a government. Over time, you will earn interest from those debts. Usually, the returns are not as great as those of stocks. Nevertheless, they are more predictable.
  3. ETFs: These are exchange-traded funds. It is an easy way for you to invest in the stock market. Instead of choosing individual stocks, you can invest in a collection. That way, you can get exposure to an entire industry rather than a particular company.
  4. Speculative Assets: This is a broad term. For example, you could include crypto. There are many other speculative assets that you could also include. Nevertheless, these are more volatile than usual. Therefore, they are riskier with the potential for greater reward.
  5. Precious Metals: Gold and silver have been investments since antiquity. Today, they represent one of the most stable ways for you to store your money. Plus, they have appreciated relatively fast over the last few years.

Related:  Which companies are best at helping you invest in gold & silver?

Getting Started

You’ve got to overcome your fear if you wish to begin. We recommend saving a few hundred dollars. Then, finding somewhere to put it. At that point, you’ve got your foot in the market. Ultimately, this should help motivate further action.

Tax Advantaged Accounts

Do not leave your money on the table. Instead, try to take advantage of tax savings. There are many different accounts with tax advantages.

Ira:

  • These are a specific type of retirement account. When you put money in them, you do not have to pay taxes on it. As long as you wait until the account matures, you’ll never need to pay taxes on them.

401(K):

  • These accounts are tax-deferred. Thus, you won’t pay taxes until you withdraw your money. Typically, you can get a reduced tax rate by waiting until the account pictures as well.

The Value of Action

Sometimes, you got to overcome anxiety. Of course, feeling some anxiety is natural. Without it, we would all make more reckless decisions.

Avoid Overthinking:

Do not worry about making the perfect decision. Everyone will make mistakes when they are first starting. It would be best for you to just take action.

Exchange Traded Funds:

When you are in doubt, put your money into an exchange-traded fund. These automatically diversify your investment as much as possible. Thus, it’s much more difficult for you to make a bad decision.

Money Managers:

Suppose you got a large amount of money to invest. If that is the case, you may want to hire someone. Some people spend their entire career managing large accounts. You might want to rely on their expertise if you do not trust yourself. Nevertheless, it’s important for you to review all of the decisions they recommend. That way, you can learn as you go along.

Long-term Strategies

Strategizing for the future is the keystone of good investing. Most of these concepts will be difficult for you to appreciate at the moment. However, within a few years, you’ll understand their importance. It would be best for you to begin familiarizing yourself with them now. That way, they are not entirely foreign when you encounter them.

Volatility

A highly volatile market can be wild. Volatility refers to how wide the swings are between the ups and the downs. In some instances, these swings can become trends. If that is the case, they have their own names.

Bear Markets:

Bear markets are when the trendlines begin to point downward. In these instances, holding onto your investments is a losing strategy. Nevertheless, there are plenty of opportunities for talented swing traders.

Bull Markets:

Bull markets are when the trendlines begin to point upward. During these times, everyone is a genius. As long as you got money in the market, you will be making money on your investment.

Swing Trading:

Swing trading is a risky strategy. It does require a significant time investment. However, it can also be quite profitable. You can boil it down into a few simple statements. Buy low. Then, sell high.  If you want a good course to follow and advise you on these types of trades, I recommend the Jason Bond swing trading program.

Your Plan

The way you craft a strategy should depend on a few different factors. Where would you like to see yourself in a few years?

Retirement:
If you are aiming to retire, you want a more conservative strategy. That way, you’ll begin to accrue wealth gradually. By the time he retirement age, you can have plenty of cash in your account.

Risky Rewards:
Are you more of an adrenaline junkie? If that is the case, you might not feel too bad when you lose some money. Then, taking a riskier approach might be worthwhile.

Tim Schmidt

A Florida-based Entrepreneur, Author, and Life Hacker, Tim Schmidt decided to take control of his retirement portfolio several years ago by setting up a self-directed IRA. This blog shares his thoughts and opinions on the top of retirement and investments. You can follow his career and travels on his Official Website as well as on his Instagram page.

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