Young adults looking to grow financially should consider investing. Saving in an account alone won’t do it, while investing can offer higher returns that help reach financial goals like buying a house or saving for retirement.
But there are certain considerations you must keep in mind before beginning investing.
Investing Basics
When planning for long-term financial goals like retirement, such as investing can often be necessary. Saving is one way of building up funds; investing can offer greater returns (and risks).
As your first step to investing, take stock of your current financial status. While this may sound depressing, understanding your starting point is vitally important. Begin by calculating debt, savings and expenses.
Risk tolerance should also be an integral component of investing. You can assess this based on life goals, timelines, available investments and your “time horizon”. To do this, think about all potential investments available as well as your risk tolerance level.
Types of Investing
Saving is an effective way to establish an emergency fund or make progress toward short-term financial goals, but investing can provide greater returns (and risks) over time. Investment options range from stocks, bonds, real estate and commodities investments as well as mutual funds and exchange traded funds.
Profits from investments typically take the form of dividend income, capital gains or price appreciation. Stocks that offer dividend income provide income while real estate or bonds may increase in value over time.
Cash and cash equivalent investments (also referred to as liquid assets or money equivalents) include checking accounts, savings accounts, certificates of deposit and money market funds. Investors should diversify their portfolios so if one type of investment fails, they won’t lose all their money – this helps reduce risk that they won’t meet their goals. If you are new to investing, consider consulting with an SmartVestor Pro on how various types of investments fit into their overall plan.
Risks of Investing
Investments involve risk. Stocks, bonds, mutual funds and exchange-traded funds all carry the potential for value to decline; even conservative investments like certificates of deposit (CDs) may not earn enough to keep pace with inflation.
Diversifying your portfolio may help lower the overall risk of investing, since you are decreasing the exposure to any one investment.
Before investing, it is also essential to assess your financial goals and time horizon. For instance, taking on too much risk may not be wise if your goal is spending the funds soon or saving for retirement. By setting goals and managing risks appropriately, setting yourself up for long-term success can make financial freedom a realistic goal.
Time to Start Investing
Investing is one of the best ways for Americans to build wealth and secure their future, yet newcomers may find it daunting due to all there is to learn and all the various advice out there.
Before embarking on investing, it’s crucial to organize your finances. This means creating an annual budget, managing spending and debt responsibly, and creating an emergency savings buffer of three or more months’ expenses.
Once all the pieces are in place, it’s important to consider your level of risk tolerance and plan how you plan on investing your excess funds. Diversifying investments so if one area of the market declines significantly, other assets can compensate and offset your losses – typically at least 60% should go toward stocks while 40% towards bonds but this varies depending on individual preferences.
