5 Great Tips for Young Investors
Investing can always seem like a daunting, distant concept when you’re young. What many don’t realise is that the youngest investors have a huge advantage over most others when it comes to building their wealth – the abundance of time.
So you may have just graduated, rented your first apartment with friends, or moved to a brand new city. Part of taking your first financially responsible steps should involve investing. The more time it has to grow, the easier it could be to meet your long-term financial needs.
We’ve put together a few tips for investing while you’re young.
1. Jump In
Learning to invest is a bit like learning a new language or playing a new instrument. If you started rock climbing, you’d start on the simpler walls with easier grabbing points, before progressing onto more and more complex structures for you to scale. Eventually, you might be able to take on the biggest mountains.
Investing is similar. As a young investor, you have the advantage of more time to study different markets, develop your investing strategies, and learn from both your successes and failures. The important thing is to take that first step and start learning.
2. Embrace Compounding
Another benefit of your investment timespan when you are young is that you can take full advantage of the power of compounding. This will be the key driver of growth as you build wealth over the next four, five, or even six decades.
To explain it simply, compounding means that each year you make money on your principal and on past returns. For example if you have £100 one year and earn 10% interest, you’ll have £110 at the end of the year. Next year you could earn 10% on that £110, and so the growth could continue exponentially. The earlier you start, the more you’ll have time for this to work in your favour.
"it's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for"
3. Build Saving Into Your Budget
If you don’t budget already, then start doing so now.
Budgeting can help you with essential routine costs like rent, student loans, your weekly food shop, and transport. But it can also show you how much money you have left to save each month.
Try putting away at least 10% of your take-home pay into savings each month. The amount can be smaller; the key lies in getting into the habit of doing this regularly.
Once you’ve got a buffer of savings for both a rainy day and emergency funds, say after 3 – 6 months, you can start thinking about investing! We like this quote by American finance talk show host Dave Ramsey:
"A budget is telling your money where to go in stead of wondering where it went"
4. Fill As Much of Your ISA As Possible
By using a Stocks & Shares ISA, you’ll be able to invest up to £20,000 a year without paying any taxes. Each year the figure goes back to £0 and you can start to fill it up again, so the more you are able to put in earlier each year, the better.
If you invest outside of the ISA you may be liable for capital gains taxes or other fees. You may as well make sure that you avoid these, as you’ll want to keep as much of your profit as possible in the earlier days – so that the money can work harder in driving your financial growth in the future.
Make sure you check out the range of ISA options available to you, including the Help to Buy ISA and the Lifetime ISA, which are both especially attractive if you haven’t bought your first home yet.
5. Follow the Wombat Way
Our investing philosophy is simple, and we’ve boiled it down into three basic steps:
- Invest for the long term
- Invest regularly
Over the years, market gains have outpaced standard savings rates in bank accounts.
Looking ahead, experts predict that markets will return about 5%. Your typical savings accounts with a bank will offer much less. With the power of compounding and regular investing, you have the ability to build wealth for the financial future you want.
Diversifying is a key element of spreading risk so that you’re not too exposed to one particular field. For example, having all of your money invested into oil isn’t going to be good if oil prices suddenly tank. But if you have your money in tech, banking, and perhaps some bonds and commodities, it’s likely that the drop in oil will be matched by an increase in value somewhere else.
We offer Exchange Traded Funds (ETFs) to make this easy, whilst also offering you a wide range of themes to give you broad exposure to a set of industries, brands, and companies.
Special note: All investing involves risk. You can lose money when investing in stocks, bonds, mutual funds, exchange traded funds, and other market securities.