Anyone who plans out their retirement would love to know how they should invest at their ages since it will greatly impact how they will spend their post-work years. It is necessary to begin investing as soon as you can in order to make the best out of the power of compounding.
The earlier you begin putting up your money in a profitable investment vehicle, the more time you will have for your investments to grow and supplement personal wealth.
Back in September 2011, aspiring students from Stanford launched a startup. They plan to establish a social media application where people can post their photos and videos that will be taken down after a few days.
Youngsters immediately took an interest in this project since they could use this as a means to publicize the things they do at school since they will disappear the next day anyway. The project was called Snapchat.
The anticipation of success was quite low because nine out of ten startups typically fail. Yet, unexpectedly, the company went viral and grew way faster than the founders had foreseen. In fact, in just a matter of four years, the valuation of their company peaked at $4 billion. The project’s success made its founders, Bobby Murphy and Evan Spiegel, into multi-millionaires.
Murphy and Spiegel aren’t the only people who found success in venturing into internet entrepreneurship. There’s also Bill Gates and Mark Zuckerberg, who have accumulated so much wealth at a young age.
Snapchat battled against the goliath-sized Facebook and surprisingly didn’t lose. Snapchat’s company price grew dramatically, raising Spiegel to $15 billion. Facebook also reached new heights and doubled its stock prices since then. Neither Facebook nor Snapchat wins— the people who invested in both Snapchat and Facebook are the real winners.
However, statistics have shown that about half of Americans have no stock possession. This only shows that half the population of America doesn’t have the opportunity to benefit from the ups in the market.
Surely, there are other investment vehicles that are safer than stocks, like bonds and real estate. However, the returns of bonds are so low to the point that the purchasing power of your money will just vanish in the long run. This is because the ever-increasing inflation rate will carry off the potential gains you can possibly make. On the other hand, real estate is pretty demanding to manage.
Still, before deciding which type of investment to make, you should take your age into consideration since it is an important factor that will greatly impact your investment.
A 40-year-old corporate worker shouldn’t invest like a 20-year-old student. This goes the other way around. It is also important to consider net worth since this would play a big role in your post-work life.
Calculating your net worth isn’t as difficult as you think. Just grab a piece of blank paper and draw a straight line to create a table.
On one side, list down the total value of your assets, including the current value of your house, car, investment accounts, retirement savings, and any valuable thing you possess. On the other side, note down all your liabilities, including your car loan, mortgage, personal loan, credit card debts, and any type of debt you might owe.
Compute the total value of your assets and liabilities and then subtract the liabilities from your assets. The total cost will be your personal net worth. Just so you know, net worths aren’t always positive. Sometimes, a person just has so many liabilities, leading to a negative net worth.
Pay off loans and start investing in your 20s
If you find yourself having a negative net worth, don’t panic! People early in their careers usually start off with a low or negative net worth, especially when they have student loans to pay off or are just starting to save for the future. So if you are in your 20s and have no savings at all, congrats! You’re not doing badly.
In your 20s, your first priority should be paying off all debts and sorting out finances. Not giving much attention to debts will only make the interest compound every year, leaving you with a higher amount of debt to pay— and if this happens, you might never be able to be financially free. Refrain from investing money if you have debts.
After getting rid of all your debts, begin investing as much as you can. Similar to debt interest, your investment interest also compounds.
Every single dollar you invest in an index fund in your 20s will be much more valuable than the value of the dollar you will invest in your 30s. So, you need to invest the majority of your income by this time. Your 20s are the only time you can live frugally since the following years will give you so much financial responsibility.
Build up an emergency fund in your 30s
In your 30s, you should already have an emergency fund that can sustain you for six months in case an unexpected crisis happens. If you are earning more than average employees, try making it your goal to invest a year’s worth of emergency funds.
It’s pretty hard to save money at this age since people usually begin building their own families, and some already have kids to support. People in their 30s typically live from paycheck to paycheck.
Although it’s difficult to set aside some money for savings and investment, do anything you can to allot 10-20% of your income for these things. Try minimizing your family’s expenses, or venture into a profitable side hustle to support your lifestyle while having the privilege to save and invest.
Save worth three times your income in your 40s
The median income of people in their 40s is a bit below sixty thousand dollars, which is quite low. The expenses they have to pay, from daily food costs to utility bills and children’s education, are expensive.
If you begin investing in your 20s, you will have extra money to spend during this life of your life because of the benefits of compound interest. However, if you did not make any investment back then and just aimlessly spent all your money on material things, be prepared to battle against financial distress.
In your 40s, it is much better to focus on investing in individual stocks rather than index funds to get a much higher return on your ventures. Nonetheless, do not use your emergency funds to gamble in the stock market.
If you want to win against the stock market, only invest money you can afford to lose and do not use the reserves you have to use in a year or two.
Give your net worth a boost in your 50s
Your net worth should be much higher than the previous years in your 50s because, at this stage, you’re getting close to retirement age. If you want to live a comfortable post-work age, you have to prepare for it diligently.
Your savings by this time around should be five times your annual income. Although this seems to be too unrealistic to achieve, it can be accomplished if you save even small portions of your income over the past 30 years.
