Camille Van Vyve
09 Apr 2024
Investing in your 20s: plan major purchases
The twenties, probably a first job and the first financial income… Even if this period is generally more conducive to spending than to investing, it is already possible, at this stage, to lay the foundations for good financial management.
Should you invest aggressively when you're young?
As a young investor, you may have been told that you should invest aggressively because you "have time on your hands." This usually means investing in a high percentage of stocks and a small percentage of bonds or cash. But that's forgetting an important part of the story: your investment goals.
What are your investment goals?
The part of your money that is intended for long-term goals, like retirement, should most likely be invested aggressively. But in your twenties, you have other financial goals in mind than to retire… you probably don't even think about it at all! Conversely, your next vacation, your wedding or the purchase of a first property are priorities. These goals require more financial planning than aggressive stock investing.
The compartment theory
For optimal management of your finances, it is wise to create investment compartments according to the horizon of your financial objectives. As the horizon of the goal increases, the investment possibilities expand. We generally consider three compartments: an emergency fund in cash for short-term expenses, a part invested in a prudent way to finance a next real estate purchase for example, and finally a part invested aggressively in shares for the objectives of (very) long term like pension.
From theory to practice
In practice, most 25-year-olds don't care much about investing. They keep their wealth in cash and spend it all when buying real estate. Result: a savings that sometimes becomes substantial sleeps on a savings account without bringing in anything for several years.
Invest as soon as possible
However, while short-term expenditure must obviously be covered by a good safety net, investing as soon as possible for the long term, even relatively small sums, should be a priority. Why? Because thanks to the phenomenon of compound interest, the accumulation of long-term invested wealth is exponential.
10 years of earnings = 2x more accumulated capital
The proof by the numbers: anyone who starts putting €5.000 aside for their pension at age 25 rather than at age 35 will ultimately accumulate twice as much capital! Knowing that the legal pension risks becoming insufficient for future pensioners, it is imperative to build up your own capital to ensure your retirement lifestyle. Easyvest did the math: €800.000 is needed to be able to pay a comfortable pension of €5.000 per month from 65 to 85 years old. As the graph below suggests, if you start early, it's far from mission impossible...
Do not invest aggressively to finance your first real estate purchase
According to a study by the Federation of Belgian Notaries, young people aged 18 to 30 carried out nearly 30% of all real estate transactions in the country over the first 6 months of 2022, while they only represent 19,5 % of adult population. Even if the rise in interest rates will undoubtedly curb the real estate enthusiasm of young people, a significant part of the savings of 20-30 year olds is probably devoted to this type of investment. If this is your case, do not invest too aggressively to finance it. A neutral portfolio is more suitable for financing a major purchase in 5-10 years.
Trust the leader in index investing in Belgium
You are interested in investing but don't know where to start? You don't have a lot of time to devote to managing your portfolio? The passive approach offered by easyvest has the merit of simplicity and transparency: by investing in a global equity tracker and a eurozone bond tracker, you get the return of the market while minimizing costs. Our advisors will help you establish the best stock/bond allocation for your portfolio, based on your risk profile and your objectives. Do not hesitate to carry out one or more simulations now to familiarize yourself with our approach!
Read the other articles in the “Investing by age” series: investing as of 1 year old, investing in your 40s, investing in your 60s and investing in your 70s.