In order to be financially prepared, it is important they start investing while they are still young and avoid financial pitfalls that plague many of their peers. This requires they learn the basic financial education skills so they are financially prepared.
Have fun and retire young by following these simple steps.
- Invest Young - There are powerful financial forces on your side when you start investing young. One of the most beneficial to young investors is compounding interest.
Compounding interest occurs when you invest money and earn a return on what you invest. The amount your investment returns then starts to earn you money. This forms a snowball affect that will make your money grow bigger the longer you are invested.
To break it down, you're making money off the interest your investment already paid you. Then you continue to make money off the interest that you made each year. That means your investments can grow faster and larger each year.
- Consistent, young, investment plan. Investing on a consistent basis may allow you to generate long-term gains over time. Most people agree, they will invest more consistently if the investment they choose is simple and something they understand; and consistency over time leads to financial security. Follow a consistent investment plan immediately; then as your investment knowledge grows you can add other forms of potential higher-return investments.
- Use investment vehicles that offer tax benefits - Roth IRA may allow you to withdraw money at retirement tax-free. Most are unaware that forty percent of a persons income goes to pay taxes. You will keep more of the money you earn by investing in an IRA. (Not yet sure on its equivalent here in the Philippines).
Diversification - For young investors the stock market can be a great place to start investing. Mutual fund investing is also a good idea. As your account size grows you could take some of that money and move it into real estate or business ventures. (Just an advice: Try to invest your money on undervalued stocks)
Diversification lowers risk. For example, if you have 'all' your money invested in the stock market when prices are declining then 'all' your money may decline in value as well. Now if you diversify your holdings and had a portion of your money invested in the stock market, some in the real estate market and some in businesses you might avoid a big loss.