Why your 20s are the perfect time to start investing – and how to begin

Emma Wall is head of investment analysis & research at Hargreaves Lansdown

Investing in your 20s is easy. All you have to do is give up your daily coffee, Pret sandwich, restaurants on your birthdays, the pub at the weekend, holidays, nice cheese, and anything else that costs money that isn’t a bill – and then you’ll be able to happily retire early and never work again. 

Simple, right?

Or not. This particularly extreme method – known as the FIRE movement, which stands for “financial independence, retire early” – is certainly not for everyone. 

It’s hard, because the pub and cheese and coffee are things of joy, and behavioural economics and the present bias means you are programmed to give more weight to your needs now – instant gratification – than those in the future, such as investing for retirement. 

Fear not. With a bit of planning, it is not necessary to sacrifice everything you enjoy for your future self. In your 20s you have time on your side, and the power of compound interest to harness. 

It’s the perfect time to start investing – and here are some tips on how to go about it.

Build on good savings habits

Millennials and Gen Z are often accused of having poor money habits – spending more on convenience, online shopping and eating out than other generational cohorts. 

But, according to Hargreaves Lansdown’s Savings and Resilience Barometer data, those in their 20s are already practising good money habits. 

In fact, 30pc of 20 to 24-year-olds have savings stashed for a rainy day, jumping to an impressive 53pc for those aged between 25 and 29. 

On average, a person in their 20s has around £10 excess income a month, rising significantly to £81 for those aged 25 to 29 – a sum that can make a significant impact on your long-term financial goals. 

Is it a good time to invest?

Before we jump into how to invest, it is important to first consider whether you actually should invest. 

Investing does come with risk, and there are no guarantees of returns. Over the long-term, history shows that investment returns comfortably beat cash. 

But if you have a fixed financial requirement or a short-term horizon of less than five years – a tax bill, a house deposit, a holiday – it is better to stick to cash. 

Additionally, it is prudent to have a rainy day fund, in case your income or employment changes, of at least three months’ expenditure.

After a decade of record low rates, cash is also currently offering attractive interest rates, so shop around for the best savings account – or use a savings platform with multiple providers – to ensure that money is working as hard as possible for you.

If you have a time horizon of five years or more, then investing could be the best way to grow your wealth. 

Over the past 10 years, the S&P 500 – a stock market index that tracks the performance of the 500 largest companies on stock exchanges in America – is up 290pc, where cash has returned just 8.6pc. 

Even in a stock market slump it is usually better to “ride the market” through the downturn and hopefully up the eventual rally. The US stock market has fallen by more than 25pc 11 times – and taken on average around two years to recoup losses. Cash, on average, took twice as long.