Eight Tips for Beginning Investors
One of the best ways to become financially secure in retirement is to develop solid financial habits early in life.
Appreciating the need to begin investing at the start of a career is critical, as is making sure debt doesn’t get out of control.
Here are eight things that young Americans can do to increase their chances of a secure retirement.
Financial Tip No. 1: Start Saving Early
The power of compound interest is the reason why young Americans, who start saving early, can amass a fortune. In fact, they can invest dramatically less cash and be far better off than people who wake up in their 40s and 50s and realize they have to get busy stashing money away. Unfortunately, most people fall into the latter group!
Just think of compounding as a snowball that gets to roll down an entire mountain instead of just one slope. Then picture that huge snowball as your retirement savings.
Financial Tip No. 2: Open a Roth IRA
A valuable account that young Americans should open up is a Roth IRA. With a Roth IRA, the money in the account grows tax- free. What’s more, when you withdraw money from your Roth IRA in retirement, the distributions are tax-free too. Another great selling point is that, unlike other types of IRAs, owners don’t have to make mandatory withdrawals after reaching a certain age.
Financial Tip No. 3: Invest automatically in the Roth
Set your retirement savings on autopilot by having a certain amount automatically withdrawn from a checking or savings account each month and deposited into your Roth IRA.
Auto-pilot investing works wonderfully with 401(k)s, but many people don’t think to use the same strategy at home. Pay yourself first.
Financial Tip No. 4: Invest in Index Funds
A great way to invest is in index funds. Here’s why: the best index funds are low cost, which will help you keep more of your investment gains. People usually don’t realize how costly many mutual funds are because they never receive a bill. Instead the fees are automatically deducted from the value of their investments.
Financial Tip No. 5: Use the Rule of 72
If you're wondering how fast your money can multiply, the Rule of 72 is always handy. This easy formula allows you to figure out how long it’ll take your money to double. Let’s suppose that you expect your portfolio to earn an average of 6% a year. In this scenario, your portfolio would double in 12 years. (72 divided by 6). In contrast, if you stuck your cash in a savings account earning 1% interest, the time to doubling would be a very long 72 years.
Financial Tip No. 6: Use a Calculator
If you’re unsure how quickly you can attain your goal and/or you need motivation, plenty of online financial calculators exist. Here is a financial calculator that can help you figure out how fast your savings will grow.
Financial Tip No. 7: Build your credit slowly
Once you obtain a credit card, it can be tempting to use it to buy things you never could afford in college. Avoid the temptation, however, to purchase items that you can’t pay off when the bill comes due.
Financial Tip No. 8: Manage your student debt
Americans who have student debt need to make sure they are handling it properly. An alarming number of student loans are in default. Federal student loans offer a variety of repayment programs that provide a safety net. You can learn what those options are on this U.S. Department of Education website.