The benefits of saving and investing in your early twenties
Publish date April 13, 2018
If you’re born between 1996 and 2014, marketers refer to you and your friends as Generation Z (or Gen Z for short). You may not feel like you have much financial power now, however your generation is poised to become the world’s largest demographic group by 2020 which means your financial power is only going to increase.
The throwback generation
People who research these sorts of things call your peer group the “throwback generation”. That’s because you place a high value on family and relationships. You’re willing to work hard. You’re responsible, determined, dependable and independent. In these ways, you’re a throwback to your Great Depression-era grandparents or great-grandparents.
You also view finances in the same ways they did. You’re not a risk-taker with your money, you don’t like debt and you really like saving your money. That’s smart. It means once you start working, you’ll have the flexibility to take the job you really want even if it pays a bit less, because you won’t have a lot of debt to pay off.
Seriously? You’re saving for retirement already?
Here’s another crazy thing about Gen Z. Although your retirement may seem like light-years away, apparently 12% of you are already putting money away for that purpose, while 35% plan to start when they’re in their twenties.1
Now, let’s get your savings growing faster
The best part about starting to save for retirement in your twenties (instead of your thirties or forties) is that your money has a lot longer time to grow before you need to use it to actually fund your retirement. The math involved is called compounding. It can help increase investment value, in most cases, far beyond the amount you originally invested. So, how does it work?
With compound interest (like when you put your money in a savings account or guaranteed investment certificate with a fixed rate of interest) you earn interest on all the money you put in at the start, all the money you add later, plus on all the interest that collects on that money over time. Earning interest on your interest over a long period of time leads to compound growth of your investment.
Think of it this way. A forest can grow in two ways; trees can be planted by hand (like your regular investment contributions), while others may grow on their own through seeds that fall from the trees you planted (like compound growth on your contributions). Given enough time, a few trees planted can grow into an entire forest without much effort.
How mutual fund compounding can grow your savings even faster
When you invest your money in equity or balanced mutual funds, it’s not interest that grows your investment, but the return on your investment from the growth of the companies you invest in. Generally, especially over a long period of time, mutual fund investments grow at a greater rate than fixed rate investments because the return on the investment can be greater. And with compounding, over time, you have the potential to earn returns on your returns, significantly increasing your potential savings versus fixed interest rate investments.
And we’ll be straight with you. There is risk involved in investing in mutual funds. Unit values and returns will fluctuate over time. However, a long-term investment strategy can help mitigate that risk because you have a long time until you need to use your retirement savings, giving your investments a chance to recover from potential market dips.
By working with an investment representative, you can also match your tolerance for risk with an appropriate mutual fund, so you can feel more comfortable with what you’re investing in.
Don’t let your savings lazily rest in a savings account when it could be working harder for you in a mutual fund.
1Gen Z White Paper – The State of Gen Z 2017 National Research Study, The Centre for Generational Kinetics