The 20s are perhaps the best time for most people, this is a time when most people leave home, kickstart their careers and explore different things in life. Although 20s are great, this is a time in your life where your decisions are most potent. All the decisions you make during your 20s will likely affect your whole life and your children’s lives. This is a guide to investing in your 20s in South Africa.
The financial decisions you make in your 20s are more important than any other time in your life. It’s super difficult for most people to turn their lives around after this decade, it’s possible but very difficult. It’s important to make as many smart financial decisions as you can in your 20s. Most people tend to put off investments for a later stage in their lives.
Understanding compound interest
You have most likely heard about compound interest; it is the magic multiplier of most investments. The main weapon of compound interest is time, it works in such a way that after enough time, the interest you earn will be far more than your total contributions. Every single year counts when it comes to compound interest.
Generally speaking, it takes around 15 years before you start realising the power of compound interest. 15 years is not a long time to wait, you would only be 35 if you had started investing exactly at age 20. However, that is not realistic for most South Africans, which is why we should push to start investing at age 25 at least.
Let’s take Khanya and Katleho for example, they both choose to invest a minimum of R5 000 per month, earning an interest rate of 6% per annum. Khanya starts at age 25 and Katleho starts at age 30. Assuming that they intend to withdraw the money at age 55. Khanya would have a total of R4.9 million and Katleho a total of R3.4 million, with a total difference of R1.5 million.
But that’s not even the exciting part; Khanya would have total contributions of R1.8 million but would earn a total interest of R3 million. Katleho would have made a total contribution of R1.5 million while earning a total interest of R1.8 million. Khanya would have made only an extra R300k in contributions while earning around R1.2 million more because of compound interest.
Different ways to invest in your 20s
Investing can seem a bit intimidating, especially when you are just starting out in your early 20s. This is the time when you should take risk, being risk averse is for people who have too much to lose. These are people with families and many dependents, as for you; this is the time to take some bold risks.
1. Stocks
Invest in company stocks, choose companies that you think are going to do well in invest in them. Imagine if you had the chance to invest in Amazon, Google and Facebook when they started. You still have the chance to invest in them today but just imagine how much money you would have made.
There are hundreds of companies that are showing the same growth potential today, all you have to do is a bit of research and make the right bets. This is how Warren Buffet became one of the richest people in the world, by simply investing in company stocks. Investing in stocks is a long game, you have to wait for more than 5 years, this is because it can take a long time before a company grows at the rate that you expect. You can invest in stocks from South African companies through the JSE, but you need to use NASDAQ to invest in companies from the USA.
The nice thing about stocks is that they pay dividends at some point. This can be a sweet source of passive income.
2. Buy a house
You really want to avoid having to buy or build a house with your retirement income. Buying a house as early as possible is usually a very good decision, a house is an investment, a good one at that. You can buy the house and rent it out if you don’t really feel like buying a house. The value of the house will appreciate so much that it might just buy you your dream house when you decide to sell it.
As a sidenote, I highly advocate for having a separate house aside from your main house. This must be a house that you don’t owe, usually at a rural area or low-income neighbourhoods. You won’t have to pay any rates and taxes and you will always have a shelter; should you lose your income due to unforeseen circumstances.
3. Open a high interest savings account
There are a lot of things that will need your money in your 20s, this is the time when you are still building your life. Putting off the most of your money in fixed investments is not wise. It’s important to diversify, open a high interest savings account.
You can earn an interest of up to 7% if you use TymeBank, this is pretty high, considering that the inflation rate is hovering around 4%. The goal of having a savings account is to have enough cash to use for emergencies so that you can avoid taking loans. Ideally, you should have about 6 months’ worth of your living expenses in your savings account.
4. Make fixed investments
Fixed investments tend to earn more interest than a savings account or short-term investments. The rate for fixed investment ranges from 7% all the way to 12% when using most investment vehicles.
Fixed investment is how you will actually grow your money, a lot of them will earn you interest that you can withdraw annually or twice per year. Having a fixed investment guarantees you that brighter future.
5. Start a side hustle
The aim should always be increasing your disposable income. Side hustles will earn you extra cash, this cash should ideally be used to grow your investment portfolio, you should always aim for a level of financial independence.
6. Live frugally
Living frugally will put you far ahead of your peers, even if you started late. Don’t spend money on things that you can do without. Limit the amount of money you spend on alcohol and entertainment, don’t subscribe to unnecessary things. Develop a “do it yourself” mentality and always cook your own food. The excess money that you save can always pe put towards investment.
7. Avoid debt
Debt should only be used for the sole purpose of building a credit score and should be kept to a minimum. Debt is the number one reason why most people can’t obtain financial freedom. The only acceptable debt to have is your mortgage, develop the habit of buying things on cash.
Conclusion
This was a step by step guide on how to invest money in your 20s. Do you have any thoughts or questions? Comment below.
