Six things I wish I’d known about money when I was 20


Pundits are divided on which path the markets will take. They often are.

Some say that the markets are so high that you should sell everything and keep the cash. Others say you should bide your time and buy the dip. And then there is a third group that claims to ignore the ups and downs and invest regularly no matter what.

I am in my mid-thirties and even after a decade of investing, I struggle to know what to do. But it is even more difficult for young people, who are taking their first steps in investment at this difficult time. I can’t tell anyone the future. But I can tell you what I wish I had known at 20.

1 Compounding makes us richer if we invest early, very early

The power of investing early is best illustrated with an example, which even some people familiar with compound interest may find surprising.

Consider two investors, Ben and Lucy, who are the same age but start investing at different times.

Suppose they both earn a nominal 10 percent rate of return, in an example originally used in the 1950s by an investment writer. richard russell.

Lucy begins investing £2,000 a year through her Isa at the age of 19 for seven consecutive years. She from the age of 26 she does not invest anything until she is 65 years old.

She has a total of £14,000 invested. At an average annual return of 10 per cent, her net gain will be £930,641 at age 65.

Ben, on the other hand, starts late. He invests £2,000 a year from the age of 26 to 65, a total of £80,000. The net gain from him at age 65 will be £893,704.

Notice that even though Lucy only made seven contributions and stopped investing, she ends up with a larger net fund of money than Ben, with 40 contributions.

His money multiplied 66 times (£930,641 divided by £14,000) compared to the 11 times (£893,704 divided by £80,000) that Ben’s money multiplied.

This is an amazing example of compounding.

2 The penny has power

I wish I had understood sooner that everything starts with the dime (or dime) in my life. That is, the money left over in my pocket could be invested.

There is a misconception among young people that you need a lot of money to start investing. You could have started very little with around £20 to £50 per month.

I wish I had understood sooner that if I had watched the pennies, I could watch the pounds as I earned more. It sounds obvious, but it is still a challenge for many. Studies show that nearly 50 per cent of UK adults need help managing their daily finances.

3 The real cost of spending money

In my early 20s, I spent most of my savings on a flashy car. It was my biggest financial mistake. Not only did it cost me to attract the wrong, high-spending company, but it set me back for the future.

I wish I had understood that every £1 spent on an asset that goes to waste costs me much more in potential future income; for example, £2 after 10 years (assuming a 7 per cent return).

The missed opportunity is often forgotten.

However, today I see the power of making the right decision through the eyes of my children, ages 7 and 9, who are learning to invest through their own Junior Isas.

While they spend pocket money too, we’re discovering exciting ways to help them understand the power of letting money multiply over time.

For example, I involve them in choosing what to invest in, which increases their curiosity about the resulting gains (or losses).

Something about seeing their money grow in general encourages them to set aside a portion of their money to grow a little more.

4 The investment path you choose matters

Growing up in my 20s, all I ever heard people talk about was “trading.” So I tried it and I made money, but I also lost a lot.

I wish I had understood that I could reduce my investment risk (and improve return) by choosing a long-term, passive investment strategy.

Low fees coupled with diversified trackers have served me well over the last decade.

What about bitcoin, you ask? It is true that a slow and steady approach means missing out on some speculative bets that look tempting. But, as the most recent cryptocurrency sell-off shows, success is not guaranteed. However, if you insist on betting a little. . .

5 Give yourself some room for a flutter

It’s okay to invest a little Part of your pot into something emotional, like joining friends in the cryptocurrency race, if need be.

But perhaps it’s best to make your emotional investment in a company where you love what it does or what it stands for, even when the financial fundamentals don’t necessarily make sense.

In 2017 I bought Tesla stock because I loved the direction of the electric vehicle and energy industry of the company and its founder Elon Musk.

However, I sold too soon after listening to other people and forgot the main reason I invested. Tesla has done exceptionally well since I bailed. Had I focused on my core emotions, he would still be a high-earning investor today.

6 What works today may not work tomorrow

Although I remain optimistic about the future, I always consider a prospect that does not meet my expectations. Investment strategies that work today may not work in 20 or 30 years as the world changes.

For example, the performance we have seen in stocks over the last 10 years may not be sustained. Inflation could remain high and interest rates could rise more than feared. New asset classes will probably emerge and also new technologies.

So while you shouldn’t ignore what history teaches us about investing, it’s important to keep an open mind, keep learning, and hedge your bets with a diversified portfolio.

Ken Okoroafor is the co-founder of the humble penny website and Youtube channel