Top 5 Money Lessons for Young Investors
Insights from a Certified Financial Planner
As a Certified Financial Planner, I’ve worked with many young investors over the years. Over countless conversations and meetings, I’ve seen the excitement, anxiety, and sometimes fear that come with navigating their finances during this critical life stage.
Though everyone’s paths are diverse, here are the five key money lessons for young investors.
1. Start Early, Even if it’s Small
The power of compound interest is a powerful thing. That’s what happens when you start saving and investing early, even if it’s just a small amount.
The earlier you start investing, even with small amounts, the more time your money has to grow. Don’t wait for the “perfect” moment or until you have a large sum.
Here’s an illustration of how your investments could grow over time with an average return of 8% over one, five, and ten years:
There’s a Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.”
1. Spend Less Than You Earn
This may seem like common sense, but it’s worth emphasizing. As your income grows, avoid the temptation to increase your spending proportionately.
Consider this scenario: A person earning $80,000 per year but only needing $55,000 to live comfortably is wealthier than someone earning $150,000 but spending $160,000 to maintain their lifestyle.
Similarly, I’ve seen firsthand that a client who earns a 5% return but has low expenses is financially better off than a client who earns an 8% return but spends all of it.
It’s not about how much you earn, but how much you save and how wisely you spend.
2. Pay Yourself First
Think of yourself as a valuable asset deserving of regular investment. Apply this mindset to your finances by adopting the principle of “paying yourself first”. This means setting aside a portion of your income for savings and investments before spending on anything else.
One of the best ways to do this is by maximizing your employer’s retirement benefits. Take advantage of the “free money” offered by your employer through your 401(k), 403(b), or Roth 401(k) plans. Most employers offer matching contributions, which are essentially “double-dipping” for your retirement savings.
I’ve worked with clients who, over their careers, consistently maximized their contributions to their 401(k) plans when they were young and by the time they were in their forties, had amassed well over $1 million in their retirement savings.
Another benefit is that contributing to these retirement plans offers tax advantages that can further boost your savings.
This simple yet potent habit ensures that you consistently prioritize your financial goals and actively contribute towards securing your future.
3. Debt is a Double-Edged Sword
Debt can be a powerful tool, but like any powerful tool, it requires careful handling. While some forms of debt, like student loans, can be investments in your future earning potential, unnecessary debt can become a financial burden and hinder your ability to achieve your goals.
In my experience working with young clients, I’ve noticed a common trend amongst some who overspend on luxury vacations or expensive cars.
Studies have shown that many millennials tend to spend on high-end luxury items and extravagant vacations. Despite the debt they carry, there is a clear willingness among millennials to forego spending in other areas to obtain luxury items like jewelry, designer clothing, handbags, and travel experiences.
Moreover, a study found that 32% of high-earning millennials planned to increase their travel spending, with more than a third planning to spend more than $5,000 on an upcoming luxury trip.
Though these experiences and items can bring short-term happiness, they often lead to financial stress in the long run.
The allure of upgrading to the latest car model can be tempting. However, the costs associated with owning such kinds of vehicles, including insurance, maintenance, and depreciation, can quickly add up and leave less room in the budget for savings and investments.
By prioritizing savings and investments over unnecessary spending, young investors can build a strong financial foundation for their future.
4. Trying to Beat the Market
The allure of quick profits and “beating the market” can be tempting for many investors. Recall the meteoric rise of “stonks” in 2021, a period where large numbers of young investors engaged in speculative trading in stocks through online platforms like Robinhood. Fueled by social media hype, many inexperienced investors rushed into heavily shorted stocks and options trading, mostly driven by emotions and short-term gains.
Some saw significant returns, and many others suffered substantial losses when the market inevitably corrected. This highlights the inherent risks of frequent trading and market timing, particularly for young investors who may lack the experience and discipline to navigate market volatility and bear markets.
It’s been shown that frequent trading and attempts at market timing often have negative effects. On the other hand, index investing offers a more efficient and less stressful approach, including:
- Diversification: Index funds offer immediate diversification by holding a wide array of assets, reducing your risk and the impact of any single company or sector performing poorly.
- Lower fees: Index funds typically have very low fees compared to actively managed funds. This allows you to keep more of your returns instead of paying them to fund managers.
- Passive approach: Index investing requires minimal effort and eliminates the need to constantly monitor the market and make investment decisions.
- Long-term performance: Historically, index funds have outperformed the majority of actively managed funds over the long term.
Other reasons why trying to outperform the market can be counterproductive are:
- Market timing is difficult. Predicting short-term market movements is incredibly difficult, even for professionals.
- Transaction costs. Every time you buy or sell an investment, you incur transaction costs, such as commissions and fees.
- Taxes. Selling investments for a profit can generate capital gains taxes, which further reduce your returns.
- Compounding. The power of compounding is crucial for long-term wealth accumulation.
- Emotional decisions. Fear and greed often drive people to make impulsive decisions about their investments.
5. Patience During Market Fluctuations
The stock market can be bumpy at times, with periods of calm followed by unexpected storms. It’s important to remember that volatility is inherent in markets, but short-term fluctuations shouldn’t throw off your long-term investment strategy.
Over the years of working with clients, I witnessed the impact that fear had on investors. During the 2007–2008 Global Financial Crisis, investors saw their portfolios plummet, leading some to panic and make rash decisions. There were clients I worked with, both young and those nearing retirement, who sold out of their stocks during that time. In hindsight, this proved to be very costly. The markets eventually recovered, and those who had the patience to stay invested were rewarded handsomely.
More recently, in 2022, the S&P 500 experienced a tough year, with a decline of 20%, while the NASDAQ declined 33%. There was fear, uncertainty, and doubt (“FUD”) amongst investors, and many were tempted to pull out of their investments.
However, 2023 turned out to be a year of remarkable recovery, with the markets bouncing back and exceeding pre-crash levels. Those who had the patience to stay invested and didn’t succumb to panic selling were rewarded, seeing their portfolios climb steadily back to new highs.
This patience underscores the importance of remaining calm and disciplined during market downturns.
The Young Investor’s Journey
As we all know, life is often filled with surprises, which can include financial setbacks and unexpected events. There may also be times when the financial landscape seems overwhelming.
In those instances, it could be beneficial to work with a Certified Financial Planner or a dependable financial advisor. When selecting someone to work with, opt for someone who is not driven by commissions or the sale of products, so that their guidance is unbiased and genuinely in your best interest.
I hope these lessons can better equip you to handle the financial curveballs that life throws your way, and on a path towards financial security.
I’m eager to hear your thoughts—what valuable money lessons have you learned along the way?
You can also follow me on X.
This article is educational and not intended as specific financial advice. You should conduct your research before making any financial decisions and consult with a professional advisor.