Investing for the 20's (Part 1)

Originally posted 2019.08.11

 

// 자주 그러는 건 아니지만, 이번 포스팅은 영어로 쓰려고 합니다. //

 

I'm thinking about doing something different this time: writing a post all in English. There's a reason for it. I have some friends who are still in their 20's, and a lot of them can't read Korean well. Plus, even those who are more comfortable in Korean, I'm sure they will understand English. 

 

When you graduate college and get your first job, you get income that's significantly more than what you're used to having while in college. You get excited to be able to buy some expensive stuff shamelessly because for the first time you actually earned that money. And once in a while, you overhear some old people saying, "oh, you should start investing early" and start to think that maybe you shouldn't spend every last dollar that you earn. But, if you were not a finance or accounting major, you most likely don't know much about investing, other than that some people lose all their money doing stocks. I get it, although I wasn't like the person I just described, because right out of college, I was in debt trying desperately to make ends meet with all those monthly payments. And I'm not here trying to judge anyone. I just want to be some sort of help for those who are interested.  

 

Life is made up of decisions after decisions. We probably make them millions of times in a day, whether consciously or unconsciously. And it's only natural that we try to make decisions that we will not regret in the days ahead. As I have shared continuously and emphatically on this blog, financial decisions are one of the most important ones. How to invest wisely is a topic the majority of people ask and try to answer, but before going into that, whether to invest or not needs to be discussed first.  

 

Should you start investing now? (when you are very young and just got your first job) The answer is a BIG YES. There is a financial term called "compound interest" and here's a quote by Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn’t... pays it.” The concept is simple and almost common sense, but the degree of how most people underestimate it is what makes it a famous financial term.  

 

Here's a simple explanation. If you invest $100 in something that earns interest of 10% per year, at the end of 2nd year, it won't be $120, but $121. Because after one year, the investment becomes $110, and during the 2nd year, the interest will not only be on the original $100, but on the new principal of $110. 

 

$100 + ($100 x 10%) = $110.00

$100 + ($110 x 10%) = $121.00

$100 + ($121 x 10%) = $133.10

 

That totally wasn't impressive at all. $120 or $121, why so much fuss about the $1 difference? However, over time, it becomes a massive difference. And that's also the reason why people say you must start investing early because "time" is the single most important factor when it comes to investing.  

 

This post is becoming longer than I thought. So, I will make it into 2 parts and end part 1 here. But before I pause, I want to share a spreadsheet I created. This was created to show the comparison between

1. investing 10 years from age 25 to 34 vs. investing 20 years from 41 to 60
2. investing in Traditional IRA (pre-tax) vs. investing in Roth IRA (post-tax)
3. total amount invested vs. total amount earned through interest

It would be great if you look at the spreadsheet and understand, but even if not, it's okay.  I will go over each item in the part 2.

 

 

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