Your 20s can be one of the most enjoyable periods of your life. You’re completing or completed your studies and are well on your way to earning your first full-time wage. Responsibilities like a mortgage or children to care for are non-existent, translating to more freedom to do what you want when you want.
A popular trend in the 21st century is for 20 somethings to delay adulting commitments like marriage, children and making investments until later in life to pursue other avenues like their career and travel. For this reason, It’s more common than ever for 20 somethings to believe that their lives will magically fall into place when they hit 30. In reality, your 20’s is the best time to set yourself up for financial success later in life. Thanks to the power of compound interest, investing early on can set you up for a bright financial future.
I’ve decided to break this post into two parts to allow you enough time to understand and digest the options listed below before moving onto the next 5.
For now, let’s dive in and get familiar with the first 5 options below.
1. Pay Off High Interest Debt
Paying off any high interest credit card debt should be your number one priority before making any investments. I can’t be any clearer on that point. By paying off high interest debt, you’ll be doing future you a massive favor. High-interest credit card debt uses the power of compound interest against you. The sooner you pay it off, the less interest you’ll pay to your creditors. This will free up more capital to eventually invest in growth assets.
If you have more than one credit card, pay down the account that is costing you the most in interest first and work your way down.
2. Invest In High Interest Yield Bank Accounts
We all need some excess cash stored away. Maybe it’s for an emergency fund, house deposit, or you need to store it while searching for another investment vehicle. Bottom line, you must keep some cash locked away safely. This is fundamental to any investment strategy.
A high interest savings account allows you to earn interest on the money you’ve deposited. This type of account differs from a transaction bank account because of its capacity to earn interest. Banks aren’t renowned for their generosity when paying interest, so it’s important to remember this option will not fast track you on the road to wealth. However, it can assist in hedging against inflation and also beats keeping cash in your shoe.
There are loads of account comparison sites that will help in making a decision. Make sure you shop around to ensure you’re getting the best possible deal. Finder.com do a fantastic comparison of different products you can choose from.
3. Index Tracking ETF Investments
Market tracking ETFs provide the perfect springboard for inexperienced investors looking to get started investing in the stock market.
Exchange-Traded funds or ETFs are publicly traded securities that group together other securities. For instance, ASX Code: IVV is an ETF that tracks the results of the S&P 500 index.
The beauty of ETFs is that you can diversify broadly across a whole market with a low amount of initial capital. Index tracking ETFs ensure you achieve market returns inexpensively without spending the time researching individual stocks.
You can invest in ETFs as you would with any other listed company on the stock exchange. Check out A Simple Guide On How to Make Your First Stock Investment in Australia for more details on making investments.
If you’re interested in the power of the indexing strategy, you should check out our recommended reading list. There you will find the Little Book of Common Sense Investing by John C. Bogle, which delves into the awesomeness of indexing.
4. Fixed Interest Investments (Bonds)
Government and corporate bonds are one of the safest investment vehicles on the market.
Essentially a bond is a medium-long term investment that involves investors providing a loan to a company or government body in exchange for interest payments paid to you on that loan every 3-6 months. The interest payment paid to you is called the coupon. Most bonds mature from 5 – 20 years and will return the original loan amount plus interest repayments back to you when they mature.
If you’re looking for additional stability, stick with Government bonds. Government bonds generally offer a lower yield (coupon rate) than corporate bonds but their credit rating is higher.
A simple and cost-effective way to get involved in the bond market is through ETFs or XTBs (exchange traded bonds). You can invest in bonds on the ASX through an online trading platform or a full-service broker just like ETF’s.
Being in your 20s, you can expose yourself to greater short-term risk because retirement is a long way away for most of us. This means you have the flexibility to invest more of your portfolio in shares. In saying that, fixed interest is always a great hedge against market volatility. For more information on asset allocation, check this post out.
5. Contribute Emergency Fund
The power of an emergency fund is invaluable when used properly. When you’re in your 20s, living paycheck to paycheck is likely something you’ll experience at some point, but living on the edge is only tolerable for so long. Having some money put away for a rainy day gives you a mental sense of security should you suffer an unforeseen expense or loss of income. A number to strive for is 3-6 months’ worth of expenses.
Remember that an emergency fund should be used for emergencies only. So unfortunately, that quick trip to Bali does not meet the criteria. To keep your funds safe from losses and easily available, your emergency fund must only be invested in a high yield savings account as mentioned in point 2.
Stay Tuned for Part 2 of our mini-series, where I’ll delve into another 5 investments every 20 Something Must Know Of, we’ll be releasing this on the 4th of May 2020.
Happy financing all, until next time.
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Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as financial advice.