In this post, I want to convince people in their early 20s to start investing, even if they have a limited income. I will highlight the power of compounding, the accessibility of small investments, and long-term wealth growth backed by historical data to support my argument.
1. The Power of Compounding
If a 22-year-old invests just $100/month into an index fund with an average annual return of 8%, they’ll have over $383,000 by age 62.
In contrast, if they start investing at 32 and contribute the same amount, they’ll only have $174,000 by age 62.
Takeaway: Starting 10 years earlier results in $209,000 more, even with the same contributions.
So, as we saw compounding works better with time, the earlier they start, the longer their money grows exponentially. Also, it doesn’t matter how little you start with, even a small amount invested early often beats larger amounts invested later.
2. Investing Doesn’t Require Huge Income
A common belief people have is that they need to earn 100k or more to start investing. This is far from being true. Many brokerage apps like Robinhood, Fidelity, or Vanguard allow people to invest with as little as $1. ETFs like Vanguard’s VOO (S&P 500 tracker) have no minimum investment if purchased fractionally.
One of the ways to do that is by reallocating small expenses like $5 daily coffee runs:
- $5/day × 30 days = $150/month.
- Investing this monthly could grow to $575,000 in 40 years (assuming an 8% annual return).
So, as we saw, even tiny sacrifices can snowball into a significant nest egg.
3. Opportunity Cost of Waiting
The economist in me has to bring this up – opportunity cost, which means the best use sacrificed. Do you know that if you wait 10 years to invest, you would have to contribute 3x more monthly to catch up?
When you Invest at 22, $100/month for 40 years, you get $383,000.
However, if you wait and start investing at 32, $300/month for 30 years, you will only get $379,000
Skipping investing early means people can lose the “free growth” from compounding during their 20s.
4. Risk Appetite in Their 20s
Another big reason to start early is that most young investors can afford to take risks because they have decades to recover from market downturns. This is the best time to invest in higher-growth assets like stocks, as opposed to bonds or savings accounts, which pay less returns.
Historically, the S&P 500 has returned 10% annually on average. Even with the short-term volatility, long-term investors consistently benefit as seen from the upward slope of the S&P 500 index from its inception till date. If you look at any 8-year window picking any two data points, it has always gone up.
In the following section I will give you a step-by-step breakdown of how to start investing in your early 20s:
Step 1: Open an Investment Account
First, you need a platform to start investing. The two most beginner-friendly options are:
- Roth IRA: A retirement account with tax-free growth and withdrawals (best if you qualify based on income).
- Brokerage Account: A general investment account without restrictions on withdrawals.
- How to do it:
- Research platforms like Vanguard, Fidelity, or apps like Robinhood or M1 Finance.
- Sign up online, which would take 10-15 minutes.
- Link your bank account to transfer money.
- Pro Tip: Choose platforms with no account minimums and low fees.
Step 2: Start Small (Even $10 a Week)
Small, consistent contributions add up over time due to compounding. You don’t need a lot of money to begin.
- How to do it:
- Determine an amount you can comfortably set aside. For Example, you can start with $10/week or $50/month.
- Use the platform’s fractional investing option to buy partial shares of ETFs or index funds (like Vanguard’s VOO or SPY).
- Pro Tip: Here is a real-life example, if you spend $10 weekly on streaming services, consider cutting back slightly to reallocate this toward investing.
Step 3: Invest in Low-Cost Index Funds or ETFs
These funds spread your money across many companies, lowering risk and giving reliable long-term growth.
- How to do it:
- Search for funds like S&P 500 ETFs (e.g., VOO, SPY) or Total Stock Market Index Funds (e.g., VTI).
- Click “Buy” on your app and input the amount you want to invest (e.g., $10).
- Confirm your purchase.
- Pro Tip: Look for funds with low expense ratios (fees below 0.1% are good options).
Step 4: Automate Your Investments
Automation ensures consistency, making investing a habit without needing effort.
- How to do it:
- Set up recurring deposits from your bank to your investment account (e.g., $50/month).
- Enable auto-invest for specific funds to keep investing the same amount regularly.
- Example: You won’t even notice $10 disappearing each week, but your portfolio will grow quietly over time. Dollar-cost averaging is an investing technique, where you invest a fixed amount every week or month without worrying about market movements.
Step 5: Track Progress & Stay Consistent
Seeing growth (even small) will motivate you to stick with investing. But remember, it is investing and is done for the long term. Don’t let the short-term market fluctuations affect you emotionally.
- How to do it:
- Check your account monthly or quarterly—not daily! Markets fluctuate over the short term and some months or years you will see a dip in your investments. But if you have invested in a diversified group of companies, significant growth starts happening after 5 years of investing consistently. The longer the better.
- Increase contributions as your income grows. For example, you can gradually contribute more. Go from $50/month to $100/month when you get a raise.
Final Note:
If you follow these steps:
- Investing $10 a week with an 8% annual return can grow to $87,000 in 30 years.
- But gradually increasing your contributions will multiply this amount significantly.
The key is starting now—every year you wait, you lose out on making compound interest work in your maximum favor. Time in the market makes a big difference!
Leave a Reply