Don’t wait to invest when the perfect time is now. Here are some tips to help young adults hit the ground running on their path to financial independence.
As we get older, financial responsibilities rapidly pile up. College loans, car payments, children, and more can all contribute to draining your bank account to the very last penny. In times like these, far too many people regret not being ready for the financial burden they now have on their plate. The best way to avoid situations like this is to be prepared in advance. Whether you are coming into your 20s or are still in your early teenage years, here are some of the best tips for investing your money today so that you can be better equipped to handle the challenges of tomorrow.
Getting the Engine Started
One of the biggest obstacles for anyone interested in investing is simply getting started. It’s understandable. Investing is a big step as you dedicate your hard-earned capital to a stock, company, or project that may potentially result in you losing money. Although it’s simple in theory, there are a few things you can do to increase the likelihood that your investment will produce a positive return. For instance, one of the best and most common ways to ensure a secured and positive return on your investment in the stock market is by holding on to strong and promising companies over the long term. Many investors will hold their positions for 20 years and see returns of more than 200% of their original investment.
So, why do people postpone investing if there is a high chance of profit in the long run?
Well, many people experience fear and anxiety when they begin their investing journey. The most typical example is investing in the stock market. Individuals will commonly buy a stock and five minutes later notice they have lost a couple of dollars. Due to this, they panic and sell the stock at a loss. A couple of days later that same stock’s price has jumped up and is now above your original buying price, meaning that had you stayed in, you would have earned some money. Another instance of anxiousness that is widely experienced is when someone buys a stock and consistently checks on their investment every minute of the day. Of course, these habits are not healthy as an investor, as one needs to be level headed at all times to make relevant and precise decisions. To help mitigate anxiety, investors should educate themselves to build their confidence and set clear goals they wish to achieve with each investment. As a young person, be sure to set most of these goals with a longer time horizon, anywhere from ten to fifty years in the future. Remember that time is on your side!
Another common issue is known as shiny object syndrome. This occurs while an individual is studying a particular method or strategy of investing they plan on implementing. However, their focus is taken away from their initial goal because they learn about another form of investing that may seem easier or have a larger potential for gains. Hence, they will abandon weeks or months of hard work to try to venture on this new path. This can even happen more than once to the same person; they simply continue hopping from one thing to the next, spreading themselves thin and never establishing a strong, actionable foundation in any one strategy. With this issue, it is imperative for investors to take a step back and breathe. At this moment, it’s important to exercise discipline and stay set on achieving one goal at a time.
Regardless of how you look at it, you will never build any wealth if you never start. Even after you finish reading this article, take some time to draw out a plan of action that you can start this week. The journey is certainly long and can be daunting, but just take it one step at a time and you will succeed.
Diversify, Diversify, Diversify
If you couldn’t tell, diversification is one of, if not the most, crucial aspects of investing. It is well-known that having a diverse portfolio of investments is the key to mitigating risk and ensuring consistent growth.
When investors commit all their funds into a single project, they have thrown away all their back up plans. If this project fails, they will have nothing else that can help them limit the damages. However, if you ensure that your investments are diversified, even if one plan fails, you will have other successful investments to reduce the impact of that one bad investment.
Though this may seem like an amazingly simple rule of investing, many individuals fail to properly follow it. Regardless, it is one of the best and most consistent tips that experts give to investors, as it guarantees a significantly smaller level of risk.
Capitalize on Retirement Accounts: 401(k), Traditional/Roth IRAs
65 percent of current workers say it’s likely they will have to work past retirement age to have enough money to retire. More than half (56 percent) are concerned that they won’t be able to achieve a financially secure retirement at all. As one can imagine, these numbers are quite concerning. To avoid ending up in situations like these, investors are encouraged to take advantage of retirement accounts while they are young.
As a tax-advantaged retirement account, the 401(k) is an excellent tool to allocate funds toward if your employer makes one available to you. Although each 401(k) plan is different, they typically average a great annual return between 5% and 8% every year. One can benefit even more when they continue to add more capital to the account over the years.
To make things even better, because the 401(k) is company sponsored, most employers will match contributions up to a certain percentage. This is literally free money, and it is always a good idea to contribute at least the amount that your employer is willing to match.
But what if your employer does not offer a 401k?
Not to worry, here is another great option for you: an individual retirement account.
Traditional IRAs give you the benefit of not paying income taxes on the money that you contribute to the account. Rather, all taxes are paid when you withdraw the money in retirement and as a young adult, you would be able to contribute up to $6,000 per year.
However, there is an account that is even better than the traditional IRA for someone in their 20s: the Roth IRA. Unlike traditional IRAs, Roth IRAs are funded with money that has already been taxed. By paying taxes now as opposed to when you withdraw it in the future, a Roth IRA is perfect for young investors who are currently in low income-tax brackets but expect to earn more in the future. As a young investor, you should open a Roth IRA through a secured brokerage bank or financial institution after doing due diligence on the broker they plan to utilize.
Have A Savings Account Growing
As an investor it is always important to save money for a rainy day. We can never perfectly predict the future, and in times when unexpected accidents and expenses arise, having an emergency fund is crucial. It is never a mistake to open an online savings account and automatically deposit a certain percentage of your income on a recurring basis. Be sure to research savings accounts that offer higher interest rates than the average. By doing this, investors are demonstrating discipline, diversity, and risk management, all crucial traits to stay ahead of the curve.
Ready To Make Your First Move?
Now that you have read through a couple of tips to get your investing journey started, you have already taken your first few steps into the investing world.
Do your best to research and learn from the mistakes of others during your journey. Map out a plan for your goals and do not be afraid to alter them a bit as the markets change. Hone your skills from the challenges, setbacks, and victories you encounter.