Friday, May 29, 2009

A Guide To Investing Early

Young people often think they don’t know enough about the market to jump in and start investing. But fear of the unknown and the misguided belief that retirement planning can wait can cost you big in the long run. There are numerous advantages to getting into investing while you’re young, but the single biggest advantage is time. When you start investing in your 20s, you get way more returns for you money. With compounding interest, your money grows significantly over time, and a little more time can make a big difference. Additionally, the more time you have to invest before retirement, the more ability you will have to recover from any market losses. Here are some essential points for young people to remember when they start investing:

Start now no matter how much money you have to invest

You don't need a large sum of money to start investing in the market. There are mutual funds that have minimum investments of $250 or less. Mutual funds are ideal for young investors because they allow you to own a bunch of company stocks without putting up a bunch of money. The earlier you start investing, the less you will have to put in the market to meet your goals. For example, if you wanted to have $1,000,000 saved for retirement at 65 years old and assumed a 10% rate of return, you would only have to contribute $179 per month if you started investing at 25 years old. That’s a total of $85,920 over 40 years. If, however, you waited 20 years to start contributing at 45 years old, you would have to put out $1,381 per month. That’s a total of $331,440 over 20 years. It will have cost you $245,520 by waiting to invest.

Keep Your Eye on the Long-Term Horizon

When investing in equities, you can't let the day-to-day trials and tribulations of the market scare you off. Both new and old investors are often spooked out of the market by short-term losses, but if you try to time the market, you can lose more than you save. In the current market cycle, stock prices have fallen sharply, but that does not mean you shouldn’t still invest in some equities. In fact now is probably a good time for young investors to buy in because you can get more shares for your money. If and when stock prices rise again, you’ll enjoy even larger gains.

Don’t Forget Debt and Savings

As important as investing is, you can’t neglect to pay off your debt and build a healthy emergency fund. Getting out of debt will save you in interest payments and improve your credit score. If you have a credit card with an 18% interest rate, paying it off is almost like getting a return of 18% on your money. The current economic crisis has shown the true importance of having liquid savings on hand. Financial advisors have long advised people to have 3 to 6 months of expenses in emergency savings, but lately that recommendation has been revised up to 6 to 12 months. Your savings should be kept in a short-term vehicle like a certificate of deposit (CD), or money market account, so that it’s easily accessible if you lose your job or have to cover for emergency expenses like car repairs or medical bills. When starting out, it’s important to allocate your money to paying off debt, building savings and investing. When your debt and savings obligations are met, then you can focus primarily on investing.

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