At first, this shocks most people. The usual response is, “Aren’t you a CERTIFIED FINANCIAL PLANNER®? Don’t you know the power of compound interest?”
Of course I am and of course I do, but I still believe that everyone in their 20’s isn’t meant to save for retirement just yet. There are two scenarios that come to mind, where I believe someone should not be in such a hurry to invest.
# 1 – Risky Career (Entrepreneur, Start up Employee)
If you’re taking a career risk, such as being an employee for an unestablished start-up, delaying retirement savings may make sense. By choosing a non-traditional career path, you’re taking enough risk. To take another risk with your investments, such as putting your entire portfolio in stocks, could be too much.
The goal is to balance the risk of your human capital, which is your ability to earn money, with your financial capital, which are your assets and liabilities. In your 20’s, your human capital has the greatest risk.
For some, once they are able to increase the value of their human capital (by acquiring skills and experience) their career becomes less risky. This usually takes until late 20’s and early 30’s. However, once someone successfully increases their human capital, and therefore their career path becomes less risky, they can afford to take more risk with their financial capital.
# 2 – High Interest Debts
If you have high interest credit card debt, the optimal choice is generally to pay it off before saving for retirement.
Not Investing, Doesn’t Mean Not Saving
Not putting your money into the stock market, doesn’t give you an excuse to spend more than you earn. If you have a risky career or high interest debt, you should save even more than someone with a safe career or no debt. The only difference is that your extra cash is going towards building an emergency fund or paying off high interest debt.
What do you think? Do you agree or disagree? Are there any other situations where someone in their 20′s shouldn’t invest in the stock market? Let me know in the comments.