Building savings is always wise for any young individual or couple. You never know when either an emergency or an opportunity is going to surface, and having cash to react properly is critical to building a prosperous future.
When it comes to actually accumulating wealth, however, a conventional savings account is not the most productive venue. Once you have built some savings — let’s say six months’ worth of income, which should cover you sufficiently if you were to lose your job or be beset by illness or injury — it’s time to think of ways to begin supplementing those savings with investments that offer hope for substantial returns.
Remember that, while you’re young and just embarking on the quest for prosperity, you also have the advantage of having time on your side. A savings account is a reliable, safe way to keep and very slowly add to your money. But with interest rates still low, a traditional savings account my not be the best means to compound your money. For that, you may need to invest in the stock market or other entities that have the potential and likelihood to grow and build real wealth. These other investments are riskier than a savings account, in that they are uninsured and don’t guarantee positive returns, but history has shown that they have a far more robust payback over time, which you have plenty of.
So how do you get started?
First, you make sure you have adequate savings, as mentioned above. Six months’ salary is recommended. Then begin your investments as safely as possible. Make sure you’re not using money that should be reserved for necessities. Money to be invested should be able to be put aside each payday or each month without imperiling any of the expenses you regularly encounter.
There are many choices, which the retirement, investment and insurance planning representatives at ALEC Investment Advisors could help you narrow down. Among them might be investments in either a retirement fund, such as a 401(k); IRAs, Roth IRAs, or mutual funds, stocks, bonds or other investments.
It can be fun to watch the market and see how your investments are performing. Surely, in contrast, there is little joy in watching interest inch up in a savings account.
Once your investment has begun to pay off and you feel confident that your nest egg is large enough to be secure, you can begin diversifying and dipping into a broader array of investments. The markets, including stocks and even some bonds, move up and down in value. They can pay off in a big way, but they can also lose value and cost you quickly and substantially. Time is the biggest factor. If you have years of investment in front of you, history tells us you probably will be able to absorb investment losses in the valid belief that those losses will be restored and, eventually, may be dramatically reversed. If you are not actually just starting out in your professional life but you are new to investing, to feel confident in dabbling in riskier enterprises you should be at least 15 or 20 years from retirement. That will give you a better chance of having enough time to regain your balance after any stumbles.
It is wisest to diversify. Diversifying provides different kinds of investments for your portfolio, usually smoothing out the inevitable ups and downs. Losses in one area can be offset by gains in another. Risk is thus potentially mitigated. It is important to note, however, diversification does not ensure a profit or guarantee against a loss.
The wise young investor may want to consult a financial professional such as ALEC Investment Advisors to choose — or help choose — targets for a variety of investments with a range of volatility. Some people, having gained experience and comfort with the markets, like to gradually assume a greater role in choosing where to put investment money.
Some proactive investors watch developments in their area, the nation and the world and like to try to capitalize on their observations. For example, an item may appear on the news that scientists have found an ingredient that is particularly effective in preventing skin cancer, so the cagey investor will find a company that manufactures it or puts it into a skin-care product. That company’s stock can provide fast, substantial returns on a stock purchase. However it may also be a volatile investment. Investors need to consider their ability to ride out the down markets with any investments.
Some investors, however choose to invest in the relative safety of professional managed portfolios to take into account eh investors goals, time horizon and long term needs. You should discuss any investment strategy with a financial professional prior to investing, and revisit it annually.
Young investors should always bear in mind that their greatest asset is their age and their future. If you have enough money now to devote expendable income to your future, there is plenty of future to offer the promise of eventual return. You shouldn’t necessarily rejoice over a short-term jump in the value of your holdings, but neither should you fret over a drop. Over years, the markets have consistently delivered handsome profits for those who have stayed with them. Please note: Historical performance is not an indicator of future returns.
Time is most definitely on your side.
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