March 06, 2017 / Published 7:00 AM EST / Alyssa Charles
Why your 20s is the best time to start investing
According to our 2016 Investor Sentiment Study, Millennials are pretty optimistic about their current and future financial situations. 41% of respondents (aged 25-34) felt that they’re in a better financial position than they were two years ago and 54% anticipate that they’ll be in a better financial position two years from now.
However, while Millennials are optimistic about their current and future finances, recent surveys suggest that they might not be as confident as they seem. Nearly 4 in 5 who were surveyed said they don’t invest. Why? Well, according to a STASH survey, Millennials find investing confusing and think they need lot of money to get started. They also don’t see themselves as investors - 60% of Millennial women think of the typical investor as an “old white man”.
Bridging the gap
There’s also a significant age gap between most financial advisors and North America’s largest generation (who were between 18 and 34 years old in 2015). Last year in the U.S., the average age of a financial advisor was close to 60, with 43% of advisors older than 55 years old and only 11% younger than 35. “Millennials I know don’t want financial advice from their parents” says Bernard Letendre, President, Manulife Investments (and father of three 20-somethings). “Young people prefer to get advice from people closer to their own age and unfortunately and there are less and less young people becoming financial advisors.” Between having less young blood in the industry to guide them and growing up in a digital age, Millennials are more willing to turn to technology for financial advice. “While using a robo-advisor may be a less intimidating introduction to investing for most young people, after 15 years, those who work with a financial advisor, regardless of age, acquire 2.73 times more wealth than those that don’t” says Bernard.
Connecting the dots
While it can be difficult to correlate saving or investing to a future goal, it’s important to understand how the two are connected. Besides helping you grow your wealth, “working with an advisor actually helps you connect specific behaviors like saving and investing to your life goals” says Barbara Foy-Pilchner, Managing Director – National Accounts, Manulife Asset Management. “It creates accountability when you have committed to a plan in writing.” Having an advisor also makes it much harder to use ‘YOLO’ as a reason for making questionable financial decisions. “Because you have someone else in the equation (your advisor), it’s much more difficult to bail out on your goal.”
Along with needing some financial guidance, “many Millennials don’t see the benefits of compound rates of return because they are so focused on the ‘here and now’ and on immediate gratification” explains Barbara. “That’s the type of society in which they’ve been raised. We need to educate them on the benefits of saving just a little each month in order to meet their long-term goals. Time is on their side right now.” Last year, Millennials spent more on their daily coffee fix than they did any kind of retirement savings but are worried that they won’t be able to retire until they’re 65 or older. For many young people, there’s an obvious disconnect between having future goals, and needing to save or invest money now, in order to make those goals happen.
So, while some Millennials might not see the value of investing in something that has delayed gratification, here’s a look at why it’s best to start investing in your 20s:
Scenario A: If you’re 25 and have no investments and plan to invest $1,200 at the beginning of each year at a rate of return of 5% for 35 years you’ll end up with $113,804.
Scenario B: If you wait until you’re 30, have no investments and plan to invest $1,200 at the beginning of each year at a rate of return of 5% for 30 years you’ll end up with $83,713. If you started investing 5 years earlier, you would have had $30,091 more. Try it yourself!
5 years may not seem very long, but it makes a big difference. Getting an early start not only helps to build wealth, it also sets the foundation for healthy financial habits.
Both saving and investing have an important role to play in your financial plan but remember that there’s a difference between the two.
Goal: Keep money safe
Short-term (usually no more than 7 years)
Can access money easily: Yes
Goal: Make money
Returns: High – depending on where and how your money is invested. There’s also higher risk of losing money.
Can access money easily: Yes, but requires some effort and there may be penalties for early withdrawals.
Have a question? Get in touch with one of our advisors today.