Should I invest in index funds in my 20's?

[Eonwe5]

Hi there guys, 

Over the last year I've been watching and reading more and more about the benefits of investing into an index fund / etf as soon as possible - but now I'm just not sure if I should really be doing it. I'm 21 years old and going to university in Europe. (No student debt.)

I mean the logic behind this sounds very convincing: If I invest monthly into a fund that covers more or less the entire global economy (with an average annual yield of 8%) and let it sit and grow for 30 - 40 years, I'll have a big load of cash when I want to retire. So every Dollar I put in now will have multiplied a couple of times by then, depending on how much I put in. 

Right now I have around 100 - 150$ left every month after paying for food and other essentials, that I could be investing. What is holding me back at the moment is the question, whether these 100$ would not be better spent on travelling or higher quality food. Investing my monthly "leftovers" into an etf would make me much wealthier in the long run, but I'm just not sure whether that's the right path to take.

Knowing what the future Me will look like just seems like an impossibility. Maybe I will find a very good use for the money and think "it was more than worth it", or maybe I'll have found a job that lets me achieve financial freedom long before I retire, then I should have better used the money in my 20's for, say, travelling and healthy food... Or maybe I'll die before I every see a penny! 

 

I was just wondering if anyone has any thoughts on this, maybe different perspectives on the matter could help me out...

 

Have a wonderful weekend everyone.

 

 

[Hello from Russia]

Imo, invest in stuff that will give you faster return of your investments - quality food, proper education, busyness, health, fitness, travelling, being social. Potentially it can yield much higher value in much faster rate. Not in terms of money only but also in terms of enjoying your life and self-actualizing.
Index funds are not the kind of investments one should pursue at such a young age, especially when being on such a low cash (100-150$ extra after monthly expenses is very low)

Edited May 18, 2019 by Hello from Russia

[jbram2002]

The answer depends on who you ask. If you are struggling to feel fulfilled, then that extra $100 could help to some degree. However, if you feel satisfied with your quality of life, then it's better to save the money than to waste it on more expensive food. The question then is how to save it.

Most economic advisors will suggest you have a safety net before you start investing. This amount varies, but most will suggest that you are able to cover your quality of life expenses (rent, utilities, any monthly payments, etc) for several months. I've seen 3 months and 9 months suggested, and almost everything in between. My personal suggestion is between 4-6 months. What is the point in investing for 30 years from now if you can't even care for yourself 3 months after an emergency? 

If that is taken care of, you should have a savings account with several thousand dollars in it. From there, you may want to examine investments. Retirement accounts and life insurance might be your best options to start. If you have those set up, then actual index investments might be a good option. I've personally made about $2000 off index funds YTD (not a lot, but not bad for 4 1/2 months).

Consider your personal hierarchy of needs before investing, and make sure you aren't tying up money or paying unnecessary fees when you can't afford it. 

[still_no_satori]

If you want a very long term investment then its a very good one. An S&P 500 index fund is a great choice.

Given the amount of money you have spare it may be best to follow the advice below from jbram first, that is good advice  

On 5/20/2019 at 0:41 PM, jbram2002 said:

Most economic advisors will suggest you have a safety net before you start investing. This amount varies, but most will suggest that you are able to cover your quality of life expenses (rent, utilities, any monthly payments, etc) for several months. I've seen 3 months and 9 months suggested, and almost everything in between. My personal suggestion is between 4-6 months. What is the point in investing for 30 years from now if you can't even care for yourself 3 months after an emergency? 

I will link a blog article I have personally enjoyed that expands on this very subject. It talks about the worth of accumulating 12 months of living expenses first and foremost...

"Runway is how many months you can live your current lifestyle based only on savings. If you spend $2000 per month and have $20,000 in the bank or other liquid assets, that's a 10 month runway. That's pretty good.

Your first goal should be to build a 12 month runway. Your number may be different, but a year is a pretty good first goal.

It takes discipline to not blow your 12 month runway on something you couldn't previously afford. That's a good thing, though, because you want to develop that discipline before you make more money. People who make a lot of money but spend all of it are barely better off than people with no money."

http://tynan.com/runway

[ZZZZ]

Will you make significantly more money in the future? IE, will you have the ability to increase your quality of life beyond the level you're at now?

 

You can't retroactively increase your quality of life. So if you're making 35K a year now and you're just getting by with a little left over, and you might be making 80K and living with a little more wiggle room later, it might not make sense to start investing now. If you would be making 80K and your assets let you live a 120K lifestyle, that difference might not be as stark as if you lived a little more comfortably at lower incomes. You'll still have a nice house, car, be able to travel, etc. at either level. However, if you are having to eat cheap or unhealthy, pass up on experiences now, ration gas, live with inconveniences, etc. You may just be better off saving your money for something big, or enjoying yourself for a little while longer now.

Invest early, but not too early.  

Lets say you do and you start putting away every penny until you either increase your salary significantly, or retire early. You might be doing this for 5-20 years. Is it worth living a minimalist lifestyle, passing up on social events, travel, food, gifts, technology, etc. for that amount of time to live a marginally better life later? The answer could be yes, but it depends on the individual and their circumstances and goals. If you strain yourself now just to retire 10 years early, are you going to be happy you compromised your 20's while you are young, vibrant, healthy, and in your prime to buy yourself a little more free time in your 50's? Are you going to want to go to concerts or festivals then? Backpack in foreign countries? Just think it over.

 

EDIT: Yes, building a savings first is probably top priority. It would suck to live minimally, invest $2,000 over the course of a year or two, and then have to liquidate everything because you need to replace your engine or something. Gives you peace of mind while working and everything else too. It just gives you options.

Edited May 23, 2019 by ZZZZ