3 Reasons You Won't Invest While You're Young
Compound interest is the name of the game. It benefits you more the longer you stay in it (hence, compound). However, to stay in it longest before you croak, you have to start young. Investing while you are young is difficult for several reasons:
1.) You feel you deserve to "live a little" after eating ramen noodles and mac n' cheese throughout college. One of my great joys in life today is only having those foods when I choose to eat them, not because I have to. So I can relate to this sentiment.
2.) You have financial obligations post-graduation that our parents and grandparents never had - mounds of student debt. The average debt for 2016 graduates is $37,172. While our progenitors went out and bought new cars, had extravagant weddings, or put down payments on houses almost straight out of college, us Y'ers and millenials get to pay for our education instead. Joy.
3.) You don't know squat about investing. I know I certainly didn't. This wound me up with an empty 401K and put me in situations where I got screwed in day trading until I wised up. It's not too late for our readers though. Start learning and investing now. Being self employed, I rolled over my meager 401K into a Betterment IRA and I have made seven percent just in the last two months alone.
Point 3 is being addressed by Financial Jiu Jitsu from a more global perspective. We intend to arm you with the knowledge to erase that item from your list of things holding you back. The other two, I intend to address in this article with a little linguistic motivation.
It requires a certain amount of splurging on, you know, craft beers, juicy steaks, and what have you, in order to keep from going insane after college. Droning on, day after day, doing the same thing over and over will wear on you (aka a day job/ "career"). And when you keep driving that blown out Honda Civic, it only adds to the monotony. You have to balance the urge to live the high life a little with the frugal lifestyle that is necessary for most of us in college. Get something that makes you feel just luxurious enough no not give up and settle into the depressing, robotic rut that 99% of people find themselves in. High end luxury cars that are 7-10 years old have tons of awesome features, and so long as you don't mind shelling out dolla bills for maintenance once in a while, or doing the work yourself. There are a myriad of options out there that are better than a typical economy car. This is one example of many that relate to balancing your life so you can start saving, and more importantly, investing, while you are young.
Not having a car payment allows you to attribute 200-500 dollars a month additional into an investment account, or savings to buy a house. In addition to that, loans and leases of behicles require you to have full coverage automotive insurance (in most states), and if you instead own your car you can pay for just liability. Depending on your driving record, that's another 60-100 dollars a month savings right there.
Now it's time to address that dirty bastard - student loan debt. Before investing, it behooves most of us to pay up all debt (except a home mortgage) before we begin saving or investing. The reasoning for this is extremely simple. The interest rates on your loans and other debts far exceed the gains you could ever see from an investment. Suppose the market does stellar and your IRA appreciates 12% in a single year. That's an absolutely killer return. But it doesn't mean squat if your credit card has a large balance and they ding you for a 20% APR.
If interest rates on loans were lower than markets, then one could get some large number of credit lines approved, and invest them all in the market, and net 2-3% a year. Add that up to a million dollars and you've got yourself a decent business plan. Unfortunately, that's not the way it works. Banks need to make money on you so they have to make sure their investment (your debt) is guaranteed to pay higher than any market index. Otherwise they'd be putting their own money in the market instead of in your hands!
So follow this simple iterative approach to financial success and the key to being able to invest while you're young:
Double or triple down on all of your loans and debt.
Continue living your frugal college lifestyle (with a few calculated luxuries)
Edge back on the frugality once you are debt free, and give yourself the treat of living a little. Continue living as though you are more or less poorer than dirt and kick your extra cash into investments, be them an IRA, 401k, savings account for an investment property, bonds, you name it.
The balance that grows in your youth will compound into dividends that far exceed what you would be able to achieve if you only begin saving once you are "stable" (which is a fancy term for being 32, having a mortgage, two car payments, some kids, and the myriad of other expenses that generally arise as a result of being middle aged).
Why not take advantage of your lack of all of those expenses to save while you're young?
But first, you must learn how to invest. Keep coming back for information on that.