One of the most important decisions a young person can make is to begin to save and invest for their future.
Why Investing When You Are Young Is Critical
The traditional safety nets your parents and grandparents have counted on are not something you should count on. Sadly, the ages of pension plans and even some Social Security may be coming to an end.
Retirement plans have largely been replaced with 401K plans and Social Security is forecasted to run out of money in the coming decades. While I am not predicting Social Security’s demise, I am predicting that, in the future, only retirees without other assets will be able to receive Social Security payments. Further, Social Security today provides only a fraction of what most would consider an acceptable income.
If you are young, you may not think these developments matter much to you. If you think retirement is something you can worry about later, well, I hate to break the bad news to you: You Need To Start Now!
Everyone needs to be focused on saving for their later years. And we are not just talking about retirement, but any financial objective.
Here’s our Explain To Me Like I Am Five reason you need to start saving and investing today – If you start today, you have to save and invest much less than if you start even just a few years ago.
Here’s and example. If you start saving $300 per month in your twenties, in forty years after earning an average of 7% per year, you will have $600,000. Wait just 10 years to start saving and you will need to save $750 per month to reach that same total in 30 years.
$300 a month is a lot of money. You don’t have to start at that amount, but you need to start with as much as you can afford. Then, every time you receive a pay increase, put half of your raise into your investment accounts. The other half can go towards increasing your standard of living.
Let’s get started securing your financial future!
Welcome to the exciting world of investing! You’ve decided, and now you’re asking what do I do next? In this comprehensive guide, I will outline the most important principles that will serve as your guiding compass on the path to successful investing. By embracing these principles, you can lay the foundation for a prosperous financial future. Let’s dive into the key principles of successful investing.
Step 1: Decide Where To Put Your Money.
Many employers have a retirement program called a 401K. The term “401K” is not important, it just references the tax code that allows this type of retirement account. The magic of 401Ks is twofold: first, you contribute to 401Ks before Uncle Sam takes taxes out of your pay. This reduces the total amount of taxes you pay and increase the dollars you can contribute without impacting your take-home pay as much; second, most employers match some amount of your contributions – that is free money from your boss, again reducing the amount you need to come up with to reach your initial contribution goal.
One key to keep in mind is that money in a 401k can only be used during retirement. If you take money out early, you will pay a penalty and taxes on the withdrawal.
For other investment vehicles, you can open an account with any of the several investment companies, such as Fidelity, Ameritrade, Charles Schwab, etc.
Step 2: Automate Your Investment
Ask your employer if they can put part of your paycheck into your account automatically. If you don’t see the money in your spending account, you won’t be tempted to spend it. This practice is called Paying Yourself First and creates immediate discipline in your savings journey.
Step 3: Set Clear Financial Goals.
Successful investing requires setting clear financial goals. Start by defining your objectives, whether they involve saving for retirement, funding your education, or purchasing a home. By establishing specific, measurable, attainable, relevant, and time-bound (SMART) goals, you gain clarity and purpose in your investment journey. Clear financial goals will guide your decision-making process, keep you focused, and provide a benchmark against which you can measure your progress.
Step 4: Develop a Long-Term Mindset.
Successful investing requires adopting a long-term mindset. Investing is not a get-rich-quick scheme but rather a gradual and disciplined process. Avoid succumbing to short-term market fluctuations and noise, as they can cloud your judgment and lead to impulsive decision-making. Instead, focus on the long-term growth potential of your investments. By staying invested and allowing your assets to compound over time, you can harness the power of compounding and realize substantial returns.
Investing diversification is a fundamental principle of successful investing. It involves spreading your investments across different asset classes, industries, and geographical regions. Diversification helps mitigate risk by reducing your exposure to any single investment. When one asset underperforms, others in your portfolio may offset the losses. By diversifying, you aim to achieve a balance between risk and potential reward. Consult with a financial advisor or use investment vehicles such as exchange-traded funds (ETFs) or mutual funds to achieve broad diversification.
Step 5: Pick Your Investments.
We suggest investing in major mutual funds and ETFs (exchange traded funds) to take the complexity out of investing. These funds are managed by professional investors who do the research for you. Of course, there is a cost to these professionals. You bear the cost of the fund managers through fees. Be sure to research the fees associated with funds of interest and find funds with low total fees.
A mutual fund or ETF is a premade portfolio of investments designed to achieve a certain goal. ETFs have become popular because shares in ETFs can be bought and sold like stocks. Mutual fund investments are not tradable and are generally good for longer term investments.
Younger people may benefit from growth-oriented funds. These funds invest in rapidly growing businesses and seek to appreciate significantly over time. There is no free lunch, however, and aggressive growth comes with a cost – which is volatility and increased risk. Growth funds can go up quickly, but they can also decline in value quickly. As such, they should be approached with caution and represent just part of your overall portfolio.
Step 6: Practice Risk Management
Successful investors prioritize risk management. While all investments carry some level of risk, it is essential to assess and manage risk effectively. Consider the following risk management practices:
1. Allocate your investment capital across different asset classes based on your risk tolerance and financial goals. A balanced allocation can help protect your portfolio during market downturns.
2. Stay informed about your investments, review your portfolio periodically, and make adjustments as needed. Regular monitoring allows you to identify any shifts in your investments’ performance or changes in market conditions.
3. Assess the risk-reward profile of each investment before committing capital. Be realistic about your risk tolerance and avoid taking on excessive risks that could jeopardize your financial goals.
Step 7: Embrace the Power of Compounding.
We started this article with a discussion of compounding. Compounding is a magical force that accelerates wealth creation over time. It refers to earning returns not only on your initial investment but also on the accumulated gains or interest. By reinvesting your returns, you can harness the power of compounding and experience exponential growth. Starting early and remaining invested for the long term allows compounding to work its magic, amplifying your wealth over time.
Step 8: Stay Disciplined and Emotionally Detached.
Successful investors maintain discipline and emotional detachment from short-term market fluctuations. Avoid making investment decisions based on fear or greed. Develop an investment strategy that aligns with your goals and risk tolerance, and then stick to it. Don’t try to time the market. Almost no one is successful doing that. You are competing with the best minds in the industry intent to separate you from your money.
Step 9: Continually Learn and Adapt.
The investment landscape is dynamic and ever evolving. Successful investors embrace a mindset of continuous learning and adaptation. Stay updated with market trends, economic developments, and technology that may impact your investments. If you watch investing content on social media, be sure to watch a mix of opinions. Follow reputable financial news sources. When consuming news, be aware of confirmation bias – the tendency to amplify opinions you share and diminish opinions that run contrary to your beliefs. By continuously expanding your knowledge and adapting your strategies, you position yourself to make informed investment decisions and capitalize on emerging opportunities.
Conclusion
These simple investment principles have been time tested. While they may seem boring, they are more reliable strategies than chasing the latest hot stock.
Wishing you all the best and tremendous investing success!
