To be young and to be free-this is the hue and cry of some groups and associations. But, it should also be the desire of those who want to invest. Why? The simple reason is that when people do invest their money when they are young, they are able to save for many things. First, they are able to put aside emergency funds, which is exactly what it sounds like-an amount of money to be used during a time of emergency. Secondly, when good money habits are developed at a young age, the importance of saving money actually increases. Lastly, when you begin to save and invest at a young age, you start to enjoy the benefits of compound interest. The earlier you start saving, the faster your money can grow, and the sooner you might be able to buy your own home and car. Plus, investing money at an early age can also help you save for your childs education, your retirement, or other major events in life.
Here are a few ways to make those savings – and those dreams – a reality.
Enroll in a retirement plan- Whatever kind of retirement plan your employer offers, grab it. Usually this is done through an automatic pre-tax contribution made from each paycheck you receive. Contribute as high a percentage as the retirement plan allows, or at least the maximum percentage level at which your employer contributes an equal amount. So, if your employer matches your contribution at up to 5%, you will want to contribute, at a minimum, 5% to your retirement plan.
Open a savings account- You can open a savings account at just about any bank or credit union, but you will want to do some research and choose the one paying the highest amount of interest. You can also set up an automatic transfer in which a portion of your paycheck goes directly into the account. This is an easy way to save as you do not have the money in hand, so you are unlikely to spend it on other things.
Invest in a mutual fund- You can also invest in a no-load mutual fund. Be careful to find one that copies the performance of the S&P 500 or other index (Dow, NASDAQ, etc.). Many of these funds have a minimum investment, which can run anywhere from $25 to $100,000, depending on the fund. Most run between $2,500 and $3,000, though. But do some research. If the account is for a 401K, IRA, or Roth IRA the minimum may be lowered or waived entirely. Some funds might even waive their minimum if automatic, recurring deductions are made from your savings or checking account. Before deciding on a fund, request their prospectus and read through it carefully.
Arrange for automatic deposits- Organize automatic deposits to your mutual fund on a monthly basis. This will help ensure your investment can grow substantially over the coming years.
Consider other mutual funds- As your money grows, consider investing in other mutual funds. These might be funds in the health care, energy, and real estate sectors.
Other Investment Considerations
Here are some tips and warnings that you need to consider when you are investing money at such a young age.
There is one thing you absolutely must do before investing, and that is to make sure you have no debt. If you are able to pay your living expenses and have a credit card that you are paying in full and on time every month, then whatever money you have left over should certainly be invested. If, however, you are unsure of your financial footing, you will want to get your credit report checked and determine what to do from there.
One key to investing is called dollar cost averaging. This means that rather than investing in a mutual fund or stock with a large sum of money, you buy a smaller number of shares over a period of time. In doing this, the cost is spread out over a number of years, thereby averaging the price between the highs and lows of the market. For this to be effective, you need to be faithful in your contributions, year in and year out-even in the bad times-regardless of the economy or the predictions of financial experts.
Should your employer not offer a retirement plan, you need to consider opening a Roth IRA. This kind of investment allows you to contribute after-tax dollars to an investment fund, without paying taxes on investment earnings or principal contributions.
Investing in employer-sponsored retirement accounts may be a good thing, but keep in mind that these funds are meant to be held in reserve until your retirement; otherwise, there may be penalties and additional fees. It is better to maintain a separate amount of savings in a non-retirement account in the event of an emergency.
Where to Invest
So where should you invest? That is a good question to ask, especially considering that investing at a young age is important. Here are some tips to consider:
1. Remember that you will retire one day, so keep that in mind and invest in a retirement account.
2. You can also invest in mutual funds; particularly those funds that mimic an index. While no stock or fund can guarantee you will earn money, with an index fund, even as the market fluctuates, you can be fairly confident that your money will grow over the long term.
3. You can also invest in familiar stocks. Do this by purchasing stock in companies that you know and whose products or services you use.
4. Invest in bonds, especially when the bond interest rates are very high. As with stock, you need to carefully choose the kinds of bonds in which to invest.