With the stock market plunging nearly 40% this year, investors of all ages and experience levels are throwing in the towel and giving up on investing. As I watch CNBC and other news channels everyday, I hear news broadcasters making claims that this is, “The worst crisis since The Great Depression”. Whenever I hear them utter those panicked words I like to replace the word “crisis” with the word “opportunity”. For young investors like you and I, this financial crisis is a great opportunity for us to start building wealth.
Since this is my first post on this blog, I wanted to discuss why it’s so important for young people to start investing for their future. Saving and Investing is probably the last thing on most young people’s minds these days, even though it shouldn’t be IMHO. Most of our parents and grandparents have traditional pension plans that pay them monthly checks to support them during retirement. These pensions along with social security payments provide a strong source of income for our elders to live on when they exit the workforce.
The problem for Generation Y is that both of these programs aren’t going to provide the same support to us in retirement. Over the past decade, an increasing number of employers have eliminated their traditional pension plans and replaced them with worker savings plans such as 401ks. This means that individuals are now in charge of their own destiny when it comes to retirement. Gone are the days of receiving stable monthly checks from your employer in retirement. As for social security, it’s likely to still be around in some form or another when we retire. However, due to funding shortfalls its likely that our generation will see either reduced benefits, higher taxes or some combination of both.
Enough gloom and doom, here’s the good news…young investors have their whole lives to prepare for retirement. When it comes to investing, having time on your side is priceless. Young investors can start with small regular investments and in time these small amounts can grow into vast sums of money through the magic of compounding. (Compounding is when you earn interest on your investments, and then that interest begins earning you more interest)
For example, let’s say a 25 year-old invests $1,000 in a diversified mutual fund earning an average 9% return. They want this money to be for their retirement, so they let it grow untouched. Here is what the investment will look like for the first 3 years, as well as the amount gained each year…
Initial Value = $1,000
After Year 1 = $1,090… $90
After Year 2 = $1,188… $98
After Year 3 = $1,307… $119
As you can see, the amount gained each year increases exponentially as time goes on. Fast forward 40 years to retirement and that initial $1,000 has grown to over $36,000. I know this is only a simplified example, and going about saving and investing is a little more complicated; but, I’ll be addressing everything you need to know soon enough.
Now that you know the reasons why it’s important to start investing today, I can begin posting on how to go about doing so. In the future I’ll be blogging about everything you need to know to build a secure financial future. The main thing to remember from this introductory post is that our generation will not be able to count on pensions and social security to fund our retirements. Generation Y needs to take it upon themselves to achieve financial freedom. Time, determination and knowledge are the 3 factors needed to do this. You have the time, my blog will provide the knowledge… do you have the determination?
If so, stick with Generation Y Investor and lets achieve financial success together.
