My 17-year-old nephew has started investing in the stock market. He is mature for his age, and I’m thrilled that he is already thinking about his future. At 17, I was more interested in girls and having fun. At the time, I didn’t consider investing, and I wouldn’t have known how to begin if I had.
His dad is an investor, so he has an excellent mentor to guide him. And he is starting early, another plus. He is developing good financial habits that will reward him handsomely if he sticks to them.
It’s not hard to build a nest egg. What’s hard is having the discipline to continue building it over many years.
It’s never too late to start or resume an investment plan, so if you’re older than my nephew, don’t be discouraged by thinking it’s too late to secure for yourself a better financial future. But if you’re young, in your early twenties and just starting your career, this is the best time to begin investing to achieve your financial dreams.
What might those dreams be? You probably have several: a comfortable retirement, a down payment on a house, funding your children’s education, maybe financial independence, or starting a business, the list goes on.
It’s not hard to build a nest egg. What’s hard is having the discipline to continue building it over many years. Unforeseen events can derail your financial goals if you let them. Events like losing your job, divorce, medical emergencies, economic recessions, and market crashes can quickly sabotage your investment plans.
You may have no choice in these situations but to put the brakes on investing. After my divorce, it was several years before I could seriously save any money for retirement. The child support I paid for my son while trying to maintain a roof over my head used up all the money I earned. It’s only in the last year that I’ve been able to start contributing to my company 401k plan. I also have some money in an old IRA and a little bit in savings.
If you’re in a similar situation, middle-aged like me, and you don’t have much (or any) retirement savings, don’t fret just get started. Find a way to free up some money to invest.
For younger folks like my nephew, the best advice I can give is to start investing and never stop, no matter what.
As a millennial, you have time on your side. That’s why it’s essential to start as soon as you can. But it is also vital to stay the course until you reach your financial goals. These guidelines will help you do that.
Pay Yourself First
I learned this tip from the book Wealth Without Risk by Charles Givens. He recommended setting aside 10% of your take-home pay and investing it. Even if you had outstanding debt, which many millennials do, such as student loans, Givens maintained that you should “pay yourself first.” Otherwise, you probably will run out of money before you can save any.
Deduct 10% of your weekly paycheck and put it in a retirement plan such as a 401k or IRA. Adjust your lifestyle to live on the other 90%. By consistently paying yourself first through investing a portion of your earnings, you will ensure a much more secure and worry-free retirement.
Make Investing Automatic
Disciplined investing isn’t hard if you don’t have to think about it too much. Automatically investing a portion of your earnings each week or month allows you to “set it and forget it.” After you have set up your investment account, link it to your checking or savings and schedule a recurring contribution, like the 10% example above, to go in automatically. Choose the investments (stocks, bonds, ETFs) you want the money to go into and then forget about it.
You will be amazed at how quickly your balance will grow over time. I have already accumulated $5000.00 in my 401k since starting 12 months ago. That money will continue to grow until I retire when I start withdrawing it.
Contribute to a 401k
If you are an employee, then check to see if your employer offers a 401k retirement plan. Most do. A 401k is one of the best ways to fund your retirement because it provides some benefits that other options like IRA’s don’t.
First, with a 401k, you can effortlessly follow the previous suggestions of paying yourself first and automatic investing. Open your account, decide on an amount to contribute, and have it deducted from your weekly paycheck. Your plan will probably offer several funds to invest in, including stock and bond funds. Pick the ones that appeal to you and get started.
Second, many employers match a certain percentage of an employee’s contributions. These matching contributions are free money that you get with a 401k that you don’t get in an IRA. For this reason alone, every employee should invest in their company 401k if they have one.
Third, the contributions you make each week reduce your taxable income because you’re investing with pre-tax dollars. With IRA’s, you are investing with after-tax dollars. With a 401k, less of your income is subject to income tax, saving you more money. With an IRA, you can deduct your contributions (if it’s a Traditional IRA, with Roth IRAs, you cannot deduct your contributions) when you file your taxes. IRA contributions reduce the tax you owe and may entitle you to a tax refund, but you have to wait until you file your taxes to get that money back. With a 401k, the tax savings come off the top.
You don’t pay taxes on any capital gains or dividends you accumulate until you begin to withdraw the money. See if there is a 401k plan available where you work and start investing in it immediately. If not, then open an IRA account with an online broker and start contributing to it.
Keep it simple
Many investors make investing too complicated by overanalyzing company financial statements, reading business news, listening to market predictions by pundits on CNBC, interpreting economic indicators, and studying Fed announcements. Most of it is just noise and has little to do with your success as an investor. Don’t pay attention to any of it!
Instead, keep things simple. The best way for investors to keep things simple is to put their money into index funds. These Exchange Traded Funds (ETF) track a benchmark average like the S&P 500, investing in all 500 stocks. These funds adjust their holdings as stocks get added and dropped from the index. As the index moves, up or down, so does the fund.
Why invest in index funds instead of choosing individual stocks? For one thing, it is hard to beat the market. Even the best performing fund managers can’t do it consistently. They may have one, two, or three good years, but then their performance nosedives. If the professionals have a hard time beating the market, then amateurs aren’t likely to beat it either. With index funds, you don’t have to; you just take what the market gives you. Again, if you have a longer-term investment outlook — 10, 20, or 30 years — you can expect the market to return an average of 7% annually, after inflation, over your investing career. Below is a chart showing the 100-year history of the Dow Jones Industrial Average.