5 Things I Wish I’d Known About Money When I Was 21

Knowing these 5 things at 21 would have made my financial life a lot easier!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s difficult being a young adult. While you have lots of energy, huge ambition and a very open mind regarding new ideas, a lack of experience and knowledge can hold you back. That’s especially the case in the financial world where, it seems, the best way to develop and improve is to make mistakes and learn from them.

However, it would be a lot easier (and far less painful) if those experiences were already known and understood at a relatively young age. For example, knowing that buying assets which appreciate, such as shares and property, as opposed to assets that depreciate, such as cars, would be a pretty good start. The reason for that is obvious, since investing as a young adult in high quality assets that are likely to increase in value over time is a far quicker way to achieve life goals such as paying off a mortgage, retiring early and enjoying a comfortable lifestyle.

Furthermore, the effect of compounding is often not fully grasped at the age of 21. That may be because at that age there has not been a significant amount of time through which returns have been able to compound but, over a decade or two, obtaining a 7% total return, for example, on shares can turn a decent sum into a small fortune. In fact, £10,000 invested for 20 years obtaining 7% per annum in total returns would become £38,697. However, the appeal of slow and steady compounded returns is often missed as a young adult in favour of more current consumption.

In addition, dividends make a huge difference to returns over a long period. Often, younger investors do not even have dividends on their radar and instead prefer to focus on capital gains via higher risk companies. This may be more exciting and get the heart racing, but in the long run solid, reliable, high-yield stocks tend to offer a more appealing risk/return profile. Therefore, as a young adult, buying 4%+ yielding FTSE 100 stocks for the long term is likely to turn out well.

Of course, a temptation in your early twenties is to invest or spend every last penny you have, leaving no emergency cash pile. This is never a wise move and it is only when a boiler needs fixing, a car tyre is punctured, or some other necessary expense occurs that this vital lesson is learned. Certainly, interest on cash is poor and often does not cover inflation, but tucking away a few quid just in case of emergency is a smart move.

Similarly, putting all of your eggs in one basket may be tempting, but comes with too much risk. This can be in terms of the shares you buy, or even the assets you hold. For example, it is tempting to buy the biggest and most expensive house possible and to have no other investments. While this may make sense in the short run, since it means living in a better home, retirement comes a lot quicker than expected and it is a very good idea to have a healthy mix of assets so that there is a balance between living for today and also planning for the future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »