5 Good Financial Tips Every Young Investor Should Follow
When it comes to investing, time is your best friend. It gives you the opportunity to ride out downturns in the market and build up your portfolio to have more invested when things are up again. But all too often, we see young adults put off saving for their retirement years. It’s hard to picture our lives 40 or 50 years into the future and a lack of knowledge or understanding of the stock market can make investing intimidating.
However, the earlier you begin, the more time your savings will have to grow in value and the more likely you are to achieve your investing goals. That’s why we’ve put together a few essential investing tips those with little experience in the financial world should keep in mind when getting started.
1. Start Saving for Retirement With Your First Job
Opting in the 401(k) plan offered by your employer is an excellent way to boost your retirement savings for several reasons. First, contributions are pre-tax meaning they come out of your paycheck before taxes reducing your taxable income for the year. Your company may also offer a matching program for contributions to your 401(k) usually matching up to 6 percent of your salary. Finally, 401(k) plans typically offer a diverse array of investment options focused on retirement investing.
2. Avoid the Seven Layer Dip of Fees When Investing
If you’ve never dug into the world of stocks and bonds before, the volume of investment choices may seem overwhelming. The good news is your financial well-being could improve significantly with the guidance of a financial advisor or broker while keeping costs to a minimum. Paying excessive fees will not help your investment performance over time. So, as you build your investment portfolio, be sure to watch out for the following investment fees:
- Mutual Fund Fees
- Mutual Fund Surrender Penalties
- Brokerage Trading Commissions
- Internal Mutual Fund Operating Costs
- Wrap Management Fees
- Markups on Bonds and New Issue Securities
- 12b-1 Fees
It’s always important to ask your advisor about their fees and be informed on all the ways you’re paying for their service.
3. Make Regular Contributions
Try to contribute a set percentage of your paycheck every month into your investment account. If you do this right away, you won’t miss the money. Contributing regularly to your account sets up a wonderful investment discipline for you, in addition to helping fund your post-career life.
4. Hold a Diversified Portfolio and Take Some Risks
Everything in life contains a certain amount of risk and this is especially true when it comes to investing. Although a savings account is a good way to hold wealth for the future it doesn’t grow substantially so invest in equities while you’re still young. This helps to grow your savings and allows you to take greater risks for a higher reward than only investing money in bonds.
Remember, don’t put all your eggs in one basket. Holding a diversified portfolio of stocks, bonds and other assets that are exposed to several sectors of the market lowers your odds of losing a ton of money.
5. Never Take Early Withdrawals Out of Your 401(k)
Keep in mind that the purpose of a 401(k) is to save for retirement. If you take money out of it now you risk running out of wealth during your post-career life. If that doesn’t convince you, consider the costs that come with early withdrawals. For example, if you have $10,000 in your account and you're in the 25 percent tax bracket, you'll lose $2,500 to taxes, plus pay another $1,000 penalty for breaking into the money before you reach age 55. (For IRAs, the early withdrawal penalty applies up to age 59 1/2, with certain exceptions.) Bottom line: Your $10,000 dwindles to $6,500.
To prepare for unexpected emergencies prepare by stashing money into an accessible emergency fund. To make things easier, automatically divert a portion of your paycheck into a savings account in addition to your 401(k) or IRA contributions.
With enough discipline and knowledge of your investing strategy, you are in good shape to build a significant nest egg for retirement. Keep an eye on your investment portfolio, rebalance when needed, and make sure your commissions and investment fees are low. Start investing as early as possible to give your investments time to build value and lastly, never stop learning more about investing. The more you know, the better chance you have to produce maximum earnings. Tie this all together by saving regularly, diversifying your investment portfolio, and accepting risk-taking as a part of the investing world and you’re on the right track to becoming a smart investor.