You are 23. You just graduated college and landed a great job paying $50,000 a year. After suffering for 4 or more years on student loan money or scholarship money, you finally have some spending power. You’ve already mapped out your plans to splurge the new dough: 70″ TV, Iphone 6, Alaskan Cruise, Luxury Condo, import furniture, etc. After all, shouldn’t you finally deserve to fully experience the luxuries that life has to offer?
Hold it! You may want to think about saving and investing some of that money.
Now, there are a million articles that explain, with math, why investing while young is a great idea. They will mention numbers like, $5,000 invested over 40 years gives you $75,000. I won’t do that in this article. I will list some of non-financial reasons to save frugally but invest aggressively while you are young.
Less Social Pressure to Spend Money:
If you are one of the few that managed to land a great paying job, why the need to blow it all showing off? I can sort of understand if your social group is full of high flying execs going to exotic places every year. However, chances are that most of your friends are also just starting out with relatively low paying jobs and a heavy load of student debt. Keeping up with the Joneses shouldn’t be very hard at all; and there is definitely no need to beat the Joneses. If most of your friends are driving 4-5 year old Honda Civics, there is no need to brag to them by leasing that new Mercedes Benz!
For most young adults, you most likely have no spouse, no kids, and no mortgage obligations (real estate investing is another matter). Then why not take some risks with investing? The absolute worst thing that can happen, although very unlikely, is that you lose the shirt off your back. All your stock holdings go to 0 and bankrupt. But if you have no dependents, no partner to take care of, then it really isn’t that big of a deal. If anything, the unlikely scenario above will teach you how to remain strong during tough times, which is a priceless skill when you plan on starting a family.
More Time to Build Risk Tolerance:
There are countless articles out there telling young investors to be 100% all in and they have to time to recover from a stock market crash.
That theory is sound…in theory. The fact is that humans are not robots. The thought of potentially losing $50,000 will keep many of us awake at night. I know I was having seconds thoughts about investing after my shares dropped $100 in market value the day after I bought it. Today, my portfolio fluctuates in the thousands and I wouldn’t bat an eye.
Risk tolerance is something that is built slowly and with experience. You cannot expect someone, who’s never invested before, to take his $100,000 that they scrimped over the years and expect them to suddenly dump it all into the stock market. Just like how Rome wasn’t built in a day, your risk tolerance isn’t built in a day. My best advice to you for building risk tolerance is to start early.
Chances are, the world won’t end and you won’t die tomorrow:
One of the most frequent excuses for not saving early is, “Why not enjoy life now while I am young and healthy instead saving for 50 years down the road and who knows what will happen then?!?!” That is a great stance to take…if the statistics were there to back it up. Human life expectancy has been steadily increasing all across the world. Human mortality rates for various diseases has been steadily decreasing.
Chances are, you won’t die. Chances are, you will live until 90. When that happens, what happens then? Will you resort to eating cat food from 65 to 90? People often forget that for the most of us, post retirement is 20-30% of our entire life.
Invest as much as you can while you are young. Your future self will thank you for it!