In the investing world where experience matters, most people think of millennials as nothing more than a reckless bunch. We beg to differ. In fact, recent studies have shown that investors between the ages of 21 to 35 are typically more conservative as compared to the older generation. However, the reluctance to take on risk at a younger age could result in significantly long-term opportunity costs.
The decision not to invest at all may prove even riskier due to an increasing number of unemployment rate, and that, on top of the competitive job market.
So if you’re looking for ways to earn a passive income outside of a traditional career path while young, here are a few key points to keep in mind when dipping your toes into the world of investing.
1. Invest in yourself first
Like anything you’re doing for the first time, the thought of Investing can understandably scary especially with real money involved. The best course of action for anyone who wants to start investing is to learn everything you can about investing. Until you learn what you’re doing, it feels an awful lot like gambling. Besides, there is no one-size-fits-all investment. Every investor has different risk appetite and goals so avoid paying too much attention to what others are doing and stick to your own financial plan.
2. Start investing early
The power of compound interest works to your advantage when time is on your side. Think of it as the cycle of earning “interest on interest”, so not only are you getting interest on your initial principle, but also on the already accumulated interest. The earlier you start multiplying your money, the bigger the principle plus interest snowballs.
For example, if you were to put aside $2,000 a year for 10 years, you’d have saved $20,000. If you invest that money to take advantage of compound interest, assuming just an average of 5 percent annual return; in 10 years you’ll only accumulate $29,671.36.
On the other hand, when you set aside $2,000 a year for 30 years, you’d have $60,000. Invest that money with 5 percent annual return; you’ll have $148,165.46 in 30 years — more than doubling your money.
3. Say hello to risk
When age is in your favor, the appetite for risk is almost certainly different when you are 20’s as compared to your 50’s. More bills to pay plus other responsibilities also mean that there is lesser room for failure. In investing, it pays to be younger where you can afford to commit errors when time is on your side. Being able to take more risk also means the potential for more reward. Could you lose money in the short-term? Sure, but that’s unlikely when you’re in it for the long-term. In short, starting early is an effective way of providing both a learn opportunity through small mistakes and a chance to let time create wealth for you.