Americans are woefully underprepared for their impending retirements. According to a recent study, roughly 57 percent of Americans have less than $1,000 in their savings accounts. And one report by the Stanford Center on Longevity estimated that one-third of baby boomers had no money in a retirement fund back in 2014, when they were an average of 58 years old.
The amount of money you need to retire will vary depending on many factors, including where you plan to live, what kind of lifestyle you plan on living, and what other benefits you’ll be receiving (like social security payouts). However, by most estimates, you’ll want to have a nest egg of at least $1 million. This puts the majority of Americans close to retirement far, far behind their recommended targets.
So why is this article relevant for a fresh teenage or 20-something college student? Because the sooner you start investing, the better, and if you start learning the ropes now, you’ll never have to worry about ending up in a position similar to these baby boomers.
How Investing Works
Investing is a somewhat vague term, since there are many different ways to invest. However, all of them share a purpose and a general approach. Instead of putting money into a basic savings or checking account, you’ll put it into a particular asset. Different assets can help you grow your wealth in different ways, and provide varying levels of risk and opportunity.
For example, you could invest in a rental property, which can return profit to you in a few different ways. If you invest in a home in a fast-growing neighborhood, the value of the property itself can increase several times over the course of your ownership. If you rent the property to tenants, you earn income in excess of your expenses and collect a monthly profit—in addition to the property’s increase in value over time.
Investing in stocks, or fractional shares of ownership in a publicly-traded company, is somewhat similar. Assuming the company grows in value over time, the trading price of a stock will increase. If you buy it at $20 a share and it grows to $40 a share in 7 years, you’ll have doubled your original investment. You may also be able to collect dividends, or regular payouts, as a source of recurring revenue.
Other investment types exist as well; for example, you could invest in bonds, index funds (which collect various types of stocks and bonds together in a single package), or even startups. Every investment will have a different level of risk and reward, and may offer extra perks.
Why Starting Early Matters
You might be wondering what this big-picture financial talk has to do with a college student. After all, it seems like something to pick up later in your career, in your 30s, 40s, or maybe late 20s. This is especially true since most college students are living on low income and dealing with the looming burden of student debt to take care of.
However, there are some major benefits to starting your investment portfolio as early as possible, even in your first years of college:
- Compound interest. When you accumulate interest on your investments, you’ll be accumulating interest not just on your principal, but also on the interest you’ve earned in the past, resulting in exponential growth. The earlier you start, the more time your investments will have to multiply, ultimately resulting in faster wealth accumulation.
- Making up for mistakes. When you start investing, you’ll inevitably make some mistakes. Mistakes are fine, and can be valuable learning opportunities, but making them in your 20s is much easier to remedy than making them in your 50s and 60s, when your retirement is impending.
- Time and experience. Investing is a skill like any other. The more you practice it and the more you learn about it, the better you’re going to be. Starting your experience in your late teens and early 20s will give you plenty of time to cultivate and nurture that skill.
What to Do First
If you’re interested in getting started investing, the best thing to do is prepare a budget that allows you to set aside a few hundred dollars a month (or even a few hundred dollars a year). You don’t need much to start a portfolio, and every bit helps. Open a brokerage account, and start by investing small amounts into somewhat safe assets that you feel you understand. Over time, you’ll gain experience and knowledge to make more complex, riskier plays, and you’ll gain more confidence as well. Even if you don’t start with much, you’ll be increasingly glad you took this step as you get older.