I participate in a number of online question and answer forums that cover a host of personal finance topics. In general, individuals write in requesting answers to their topic and everyone else chimes in with their perspective. Over the last couple of weeks, there were a couple of instances where the topic of discussion was about, set it and forget it investing in your 20s. The questions were written by “20 somethings” wanting to know how they should get started.
The questions took me back a bit as I thought about my own finances when I was in my 20s. I started thinking about my first car loan, saving for a house, credit card debt and how much money I was making when I graduated from college and started my first “real job”.
Those were good times. I was young, inexperienced and learning new stuff every day. Of course, being that age I hadn’t traveled down the road of life far enough to really understand how my actions might impact my future.
Which leads me to this article and set it and forget it investing.
I wish I knew what I know now about investing, back in my 20s.
The big buzz in the world of investing these days is cryptocurrencies and how you can make a fortune fast. I’ll be honest, I’ve done a little research on them, but really don’t know much about them. My perspective is that I will start paying more attention to them when the major brokerage firms like Fidelity and T. Rowe Price start touting them as recommended investment options.
Regardless of what happens with cryptocurrencies or someone’s next big stock recommendation (these are a dime a dozen), I know from my own experience that the secret to investing is less about the specific security you invest in and more about how you approach the whole investing process.
Call it wisdom, experience or practice, but the one thing I have learned and tell others is that starting early and thinking long-term is the best investment advice I can give anyone in their 20s.
Set It and Forget It
If you’re reading this and you’re in your 20’s you probably have never heard of the company Ronco. If you’re in your 30s it may ring a bell, 40s, and 50s you’re probably familiar with their infomercials.
The “Set it, and Forget it” phrase was coined by a gentleman named Ron Popeil an inventor, entrepreneur and the former owner of Ronco. Ronco manufactures small kitchen appliances that are designed to make cooking simple and easy. One of their signature items is a Rotisserie Oven. The oven is designed to cook a host of products and because it has a built-in timer you could set the timer and the food would cook on its own – hence the phrase “Set it, and Forget it”. This phrase was popularized by his T.V. infomercials where he touted the benefits of his nifty kitchen appliance.
Right now you’re thinking what the heck do kitchen appliances have to do with investing in your 20s.
For many, when they think of investing it is a very conscious and somewhat manual decision-making process.
- You receive a tax refund so you decide to invest half of it.
- You receive your paycheck and decide to put 10% in an IRA account.
- Or maybe you receive a large bonus and decide you’re going to invest it in a specific stock because it’s the next Amazon.
There is nothing wrong with this process, but the manual, conscious nature of it means your ability to consistently invest will likely waiver over time. And that’s because we’re human, which means we can easily get distracted by something else that might provide more gratification then investing or planning for some distant goal like retirement. Inevitably what happens is sometimes we invest, sometimes we don’t.
When it comes to investing, making more money and building wealth, consistency and repetition are a critical component of success. Specifically, because over the long haul the right investments will weather the ups and downs of the market and produce positive results. Talk with any financial advisor, brokerage firm or someone who has been investing a long time i.e. Warren Buffet and they will tell you this is true.
From an investing perspective, this is where “Set it And Forget it” comes in. It’s the processes of removing the conscious decision making part of investing. It’s a way of automating the process so you can be consistent and repetitive in your efforts. A way of investing without actually thinking about it. “Set it and Forget it” is what I wish I really understood about investing in my 20s.
Almost a Millionaire – Set It and Forget It Investing
“Set it and Forget it” focuses on payroll deduction or direct deposit as a method of making your investment contributions. It’s less about how much you can contribute to an investment and more about contributing something – anything. So you can establish a consistent and repetitious pattern. Consistency and repetition take advantage of two of the most important aspects of investing – compounding and time. The longer you have to invest and the more times your rate of return is compounded the more money you make.
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Here are some examples of how you can Set it and Forget it.
- Contribute to an employer-sponsored 401k plan via payroll deduction. And allocate your contribution to stocks, bonds or mutual funds.
- Fund a Traditional or Roth IRA through your local bank or a brokerage firm via direct deposit, investing in select ETFs or mutual funds.
- Secure a brokerage account with a company that provides automated investing, like Wealthsimple. Where money is withdrawn from your savings account every month. Investing in a high yield dividend stock, ETF or target date mutual fund. Not familiar with automated investing? Watch my video on robo-advisors and automated investing.
All of these methods remove the conscious, mindful and manual process of investing. Because the money you decide to invest is taken out of your paycheck or account before you can make the decision to do something else with it. Once you start and become accustomed to your paycheck allocation you never miss the money. What you don’t miss won’t get spent somewhere else.
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Consider how the consistency and repetition of “Set it and Forget it” can work for you if you’re in your 20s.
- If your 25 and plan to retire when you are 65, that’s 40 years
- Invest $2,500 annually through payroll deduction or direct deposit. $2,500 is $96.15 per paycheck. (26 pay periods per year)
- Invest in a Morningstar 4/5 rated mutual fund earning on average 9% per year.
$844,706 is how much money you will have when you retire at the age of 65, you’re almost a millionaire. That’s a sizeable retirement nest egg, and the best part of it is that you never had to make a conscious decision about any of it.
Incidentally, if you were to contribute $3,000 annually or $115.38 per pay period you will be a millionaire. $1,013,647 is how much you will have when you retire.
If your employer does not provide a 401(k) plan, consider opening an Individual Retirement Account with Wealthsimple. Wealthsimple provides both Traditional and Roth IRA options. They can provide an automated “”set it and forget it” strategy, and they will help you select investments to meet your goals. You can signup for a Wealthsimple account here.
It’s Not Flashy – Investing in Your 20s
In my 20s I was focused on career, a relationship, family and achieving success in any form – like many 20-year-olds today. Back then it was companies like Yahoo, Apple, and Microsoft that were the latest investment buzz. And if you would have invested in them you would have made millions. Today cryptocurrencies are the latest hot topic and for all I know maybe the next investment windfall. In the future, I have no doubt there will be some new industry, market or investment security that will be the new “something” to invest in. One thing for sure, time will tell.
If you’re investing in your 20s and gung-ho about making your millions overnight I say go for it. You’re in your 20s and have plenty of time to recover if your investment takes a dive. However, don’t forget to diversify your options and take advantage of a strategy that will provide you with a more conservative long-term approach. It’s simple, figure out how much you can automatically allocate to investments via paycheck or direct deposit then “Set it and Forget it.” It’s an approach I wish I would have taken in my 20s.
P.S. The “Set it and Forget it” concept also works for saving money and at any age.
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Do you participate in a 401(k) or IRA? Comment below.
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