November 8, 2016 | by James Behr Jr & Christopher Paleologus
When it comes to money, everyone makes mistakes. Luckily, if you are in your 20s you have plenty of time to recover. These years can provide you with important lessons for future decisions, and the amount of time you have before retirement can minimize any investing mistakes you are likely to make. Our goal is to help you make as few investing mistakes as possible and put your financial goals within reach.
Retirement may seem like the distant future for someone in their 20s, and with this time comes the ability to take on risks with the potential for higher returns. However, according to Lindsay Larson, a marketing professor at Georgia Southern University, millennial investors are not taking necessary risks and are settling for retirement accounts with guaranteed income as opposed to stocks. Such a strategy would yield low returns over time, if left relatively unchanged. Larson’s study reveals the low financial knowledge that is possessed by many millennials. Due to this limited knowledge, millennials fear making mistakes and thus struggle with independent thinking, decision making, and risk taking. You can afford to take on more risk with the hopes of recognizing higher returns because you have time to recover any losses you may incur.
Millennials should also be sure to avoid being impatient. As a millennial, it is important to continue to build human capital to continue to progress both professionally and financially. The correlation between impatience and human capital is that impatience impedes human capital advancement. As a study by Brian Cadena of the University of Colorado Boulder shows, impatient people are 50% more likely to drop out of high school, 20% more likely to drop out of college with only one year completed, and 70% more likely to not finish their degrees. The result of such impatience is reduced lifetime income and in turn, reduced savings. Those who are impatient have difficulty in furthering human capital because they are more likely to switch jobs. As a result, they limit their chances of developing human capital and working towards promotions. Cadena’s study concluded that impatient people will earn on average roughly $75,000 less than patient people by the age of 45.
Arguably the biggest mistake someone in their 20s can make is not beginning to save any money. Having some savings stashed away as a “rainy day” fund or “emergency” fund for any unforeseen expenses that could occur is always a smart idea. Furthermore, if you have the financial ability to begin investing money for retirement, through an IRA or your company 401(k), you should start to do so. If your employer 401(k) offers a matching contribution you should begin taking full advantage of that as it is essentially free savings that can enhance your returns even more! The greatest investing advantage you have is: Time. The power of compound interest over time has the ability to drastically increase investment returns and we have written about this before here and here. It is also a mistake to leave your 20s without good and established credit. There will be larger purchases that will require you to take on debt and without a respectable credit history you will end up paying more in interest and as a result saving less.
As a millennial, it is important to avoid making mistakes with your money that can jeopardize your investing goals. To mitigate these risks, start saving now, it is important to be willing to take on calculated investing risks to earn high returns. If the risk fails, you have time on your side to recover your losses and get back on track. Also, take advantage of free money in the form of employer matched 401(k) contributions. Furthermore, avoid becoming impatient because it can eliminate opportunities to further your human capital and income. As a millennial investor, avoid certain mistakes and take advantage of the fact that time is money.