There are certain advantages that youth affords that once lost cannot be regained without much strife, and yet the young, for the most part, fail to capitalize on these opportunities as they present themselves. The following is a list of tips that are geared to help young investors become more aware, so they can board the ship before it sails.
Time is on your side, but don’t get cocky.
Time is of the essence. Nothing can be more apt when considering the effect of time on an investment portfolio. The earlier you start saving the better it is for you. Ideally you should start putting aside money as soon as you get your first job. You may graduate from college a confident investor, even if you studied finance at university, but it is important to get your feet wet nonetheless. When it comes to saving and investing there is no time like the present.
Harness the power of compound interest.
The wonders of compound interest have turned many indifferent investors into staunch believers. When you see the numbers in black and white it is impossible to deny the impact of starting as early as possible, because it is based on sound mathematical principles. If you started saving $100 a month at the age of 18 at a rate of 4% you would have approximately $70,000 by the time you were 50, whereas if you started at 28 you would need to save $200 a month just to get the same amount of money. A gap of ten years could mean you would have to put aside twice as much to have the same principal. This is prime example of the importance of your twenties, the years that can slip away so easily as we are occupied with other things.
Saving is not investing.
It is crucial to recognize that saving and investing is not the same thing. Putting aside money that can be easily accessed in case of an emergency is necessary, but it does not count as investing. Investing must involve some degree of risk, which would pay an appropriate return. Stocks, mutual funds, exchange traded funds and bonds are all considered different classes of investments.
You don’t need a lot of money to start investing.
There is a common misconception that to begin investing you require a significant amount of capital. This is certainly not the case. You can invest as little as $100 in a mutual fund and earn a significant return. Of course, if you are in a situation where you are saddled with large amounts of high cost debt then it makes sense to postpone investing unless you can reasonably expect to gain a return that is high than the interest owed on your debt. Which brings us to the next point…
Manage your debt, manage your life.
Debt is sometimes a necessary evil, as it makes it possible to achieve certain life goals within a reasonable time frame. It is quite normal to take on mortgage debt for instance, because the assumption is that you would not be able to purchase your home with cash and also that the value of the house you buy will appreciate over time, which means that the relative cost of your debt will decline over time. You should steer clear of taking out loans to buy depreciating assets such as vehicles unless it is absolutely necessary and credit card debt should definitely be avoided. Managing your debt as a young age positions you to take advantage of investment opportunities as they arise, as you are not tied to debt obligations. Maintaining control of your outstanding debt also means that you are not paying out more than you are earning on your investments.
The most important thing is to have a plan.
The importance of goal setting cannot be emphasized enough. Goals set a clear path for where we would like to be and this makes coming up with a financial target as easy as putting a cost on our visualized goal. For instance, if you know that you would like to buy a house in a certain area; you can price properties in the area and come up with a plan of how to achieve your goal in a certain time frame. If however, you have no idea of where you want to be, it makes investing a little more obscure because there is no end in mind. Devising a plan makes the financial planning journey a lot less rocky.
Young investors should always remember that while it is fine to live in the moment, you must never neglect to plan for the future.