The last semester of college, a moment in quantitative methods class changed my life. That day, ears perked up when the professor said, “What if I told you that you could become millionaires by only investing from 22 to 30, and never invest another cent?”
A lot of the students laughed, but the professor said he was serious. And he wasn’t talking about a get-rich-quick scheme or day trading.
Over the next 30 minutes he laid out how if we invested $500 per month from ages 22 to 30 in the S&P 500 and earned 12 percent per year, then we’d have $6 million in the bank by the time we were 65 . I couldn’t believe it! I was SO going to do this!
It is important to save and invest money in your 20’s more than at any other age. The power of compounding interest is at its greatest in your 20s.
With that said, here are a few ideas to do with your money in your 20s.
1. Pinch Every Penny
Your ability to save money affects your overall financial outlook more than any annual raise ever will. Contrary to what most people think, it’s not about how much money you can make, but about your ability to save. A few pennies here and there add up, and married with the power of compounding, those pennies have the greatest power in your 20s. So don’t be like everyone else out of college: Bypass the flashy car, the newest phone, and the biggest flat-screen TV.
2. Start a Small Business
If there is any time to take a risk, it’s your 20s, when your financial responsibilities and commitments are typically the smallest. One great example of having an entrepreneurial spirit is this 14-year-old girl who bought a house and appeared on “The Ellen DeGeneres Show.”
3. Pay Off Debt
The more debt you have in your 20s, the less money you have earning you interest. The power of compounding works against you and in favor of your bank or mortgage company. Pay off your smallest debt first. Then, when it’s done, roll that payment to the next-smallest debt.
4. Invest in a Good, Low-Cost Mutual Fund
Vanguard offers a lot of quality index funds that will help diversify your money, and start getting your money working for you.
5. Go Back to School
In The Game of Life, you choose either to go straight into working or to college first. Ever notice how it’s almost impossible to win the game without going to college? The same is true in real life. If you invest in furthering your education, it will have long-term effects on your earning potential and ability to save more. Think about getting your master’s or finishing your undergrad.
6. Reward Yourself
Life isn’t about sitting at home eating PB&J on a Saturday night with no furniture or lights on (because that’d be too expensive). Live a little! Reward yourself once you get to certain savings levels. Whatever your goal is, write it down and make it visible daily. This will help you to have something to strive for and remind you that your 20s aren’t all about sacrifices.