The importance of laying a groundwork for your personal finance and investment when young cannot be overemphasized as it provides the ability to undertake investments with increased risks (that enjoy equivalent higher returns) as well as a stable foundation for a possibly successful financial future.
While investing in your 20s, it is pertinent to have an understanding of the different risk levels of investment options and structure your portfolio to fit your risk, return and diversification requirements. These risk levels are discussed below.
Low-risk investment options: These include relatively less risky investments like bonds and bond funds. This should be used for capital preservation.
Mid-risk investment options: Relates to mutual funds and ETFs that track the performance of other broad ma key indexes e.g. S & P 500.
High-risk investment options: Includes individual stocks, aggressive mutual funds and ETFs, commodities, real estate etc.
Key factors to consider: Diversification is key when investing (even in your 20s), as such you need to find an allocation plan across various types of investments that works for your long-term goals and risk appetite.
Some key factors you must consider before you start investing while in your 20s include:
Practical budget and an emergency fund: Keeping a practical budget shows how much you make, versus how much you spend, and helps portray how much can be set aside for savings and investment purposes. This information is key as when investing in your 20s, consistency is very key due to the law of compounding which helps multiply returns.
In line with this, keeping an emergency fund is also necessary. An emergency fund relates to money set aside for the equivalent of 3 – 6 months of your living expenses. This is necessary as an investment should be treated as a long-term thing and not short-term, and thus an emergency fund will be ideal for any unforeseen expenditures that may occur in the short term.
The amount to be maintained in your emergency fund varies by your cost of living, sustainability and periodicity of your income, etc.
Determine how much can be invested periodically: When investing in your 20s, consistency can be a great tool in achieving your financial goals. As part of your monthly budget process, you can set aside a particular amount of money periodically towards investing in your preferred type of investment (based on your investment plan).
Other factors to consider include:
- What is your investment time horizon?
- Are there any specific goals you plan to achieve?
- What is your risk appetite (ability and willingness)?
- Are there any tax benefits of investing in your jurisdiction?
- Are there any employer matching schemes that you can take advantage of?
Putting these factors into consideration will guide the timing, type and duration of your investment.
