Are you fresh out of college? Are you already thinking 30 or 40 years into the future? While most people who are not even 25 yet rarely think about savings here are some helpful tips for those who do and are thinking about their future. As you know if you read my blog on a regular basis, I am a true believer that it is never too early to plan for and start saving for your retirement.
First we will look at the concept of saving to begin with from the start. First it is important to create an emergency fund of about six months’ worth of expenses that one keeps in a safe and accessible account such as a money market account or savings account. This money is not what I consider savings or money that you generally do keep in a savings account that could and you invest. By keeping these funds in a savings account, you are earning almost no return on these funds and not a return that will outpace inflation. Saving for retirement should be done in a tax advantaged way such as a workplace 401(k), an IRA or if you are self-employed a SEP IRA. These are considered investments and in theory should outpace inflation that has averaged about 3.9% a year. Your investment needs to make a return that is larger than 3.9% a year just to keep even with inflation. Now it is true that by keeping your money in a savings account or a CD, it is safe, but I can almost guarantee that inflation will eat at everything you have saved not leaving you with as much money as you need. By investing and taking on extra risk, you should be able to save enough money that will allow you to retire and have a nest egg that has outpaced inflation.
Now some basic terms that you will need to know and understand at least to some degree. A security is simply a financial instrument. Now there are different types of securities but when you hear the term most people think of stocks. There are two basic types of securities, debt security where money is owed to you such a US government bond and equity security such a share of stock in a company that is a small piece of ownership. Stocks are traded on exchanges, and many are tracked by indexes such as the DOW or the S&P 500 which are simply a collection of companies that are traded on that particular exchange. An example of an exchange is the NYSE or spelled out the New York Stock Exchange. Bonds can are bought and sold as well, and the prices for them can be found in certain publications and through people who are authorized brokers of bonds. Another key to investing in securities is diversification that simply means spreading your investments over several assets or security classes. It is best to own some stocks in different sectors or business lines, bonds in different companies or governments and commodities such as silver and gold. What is the best percentage to put in each security? That answer depends on how old you are and what you risk tolerance is. No matter what never put all of your investments in one asset or security.
Now on to some other items that you will need to be aware of when investing. When investing fees and commissions are paid to brokers. If you invest in a stock, you will be paying commissions to buy and sell the stocks. If you own an exchange traded fund or a mutual fund, you will be paying commissions to buy and sell as well as management fees to the company that actually manages the funds. And if you do not want to pick individual stocks the funds are the way to go as they will get you the returns of stocks with instant diversification as well. Investing within tax advantaged accounts such as an IRA, 401(k) or annuity will provide you in your retirement years, and a 529 will give you a tax advantaged saving for college expenses. Know and look for ways to invest that are advantageous to you tax wise.
How to invest may be a good thing to look at now that we have covered some of the more basic things you need to know. Starting in your 20’s will give you a major advantage over someone who even starts at say 30 or 35. The power of compounding interest is something that you want to work in your favor and time will allow just that. Just a word of advice and no this is not something that is to be ignored do not buy the hot stock or make a purchase of a stock tip. Before you buy any security you need to do your homework on it to understand how the company makes it money and how sound the company is. There is nothing worse than investing in a company that has poor financials and you lose your money. But if you are to lose money the time to do it is when you are young and you have time on your side to make it back through the power of compounding interest. Also, you need to think long term and avoid short term investing which is risky and can be costly to your account. It is also wise to put money that will be needed a liquid account and invest money that can be kept invested for at least five years.
Now this is the final bit a basic information that everyone needs to understand and not just someone who is 25 years old. And that is no one can predict the future of where the stock market or any investment will go in the future. It is also important to understand that past performance is by no way an indication of what future performance will be. History does not guarantee future performances by any asset or security. And no one knows everything about the market or asset class. The best we can do is always do our homework on a security and keep current on how it may do. When in doubt seek the advice of a professional who can help you and help keep emotion out of your investments that are vital to success.
If you have any questions or need any additional information feel free to contact me and I will be more than happy to assist you in any way I am can.
