With an economy that has been struggling, young people are a little weary of investments. The job market is difficult for young individuals, the stock market seems sketchy and there aren’t a lot of extra funds to be locked up in 401(k)s, mutual funds or CDs. Money may be tighter and having less than 100 percent control over it might be too unsettling to contemplate.
Investing can also appear complicated and time consuming. Unless you’re a finance major, the last thing you want to do is start studying up on something that could significantly impact on your future financial life.
There is good news for the timid investor, though.
The younger you are, the less you have to worry about a mortgage, family responsibilities and other expenditures that would otherwise deplete your income. It’s a great time to start investing because you have a fairly blank financial slate and plenty of time to accumulate earnings. Even if you start putting away small amounts, it’s never too early to invest with your extra money. Every investor usually wishes they started earlier.
Before You Begin Investing, Do This
First, get yourself out of any debt. Even if you’re investing aggressively, your portfolio is never going to appreciate fast enough to catch up to those high interest rates on the credit card or student loan.
Next, analyze your overall financial goals and establish a time line. Are you investing money that you need back soon or are you putting money away for a future house, family or even retirement?
Regardless of how much or how little, it’s smart to start allocating a portion of your paycheck toward some sort of investment that can provide a return.
Addressing the Issue of Liquidity
If you’re interested in making an investment, but you’re concerned your money won’t be accessible when you might need it, you may choose to start out with a general savings account, money market account or certificate of deposit.
Savings accounts and money market accounts have lower returns compared with other investments, but the funds are liquid and protected by the FDIC (as long as the institution is FDIC-insured).
Short-term CDs are a bit less liquid, though they will probably offer a higher APY than a savings account or money market account. They are also a great way to begin investing because you can see what it’s like to put away money for a chunk of time, which can act as training wheels for something like a Roth IRA or 401 (k) through an employer. CDs are also generally FDIC insured.
Learn to Love Risk
When it comes to stocks, mutual funds and bonds, you have the opportunity to earn a greater return and much faster. You also run the risk of losing the money that you invest during a market downturn. Instead of putting money into an account that appreciates over time, and is FDIC insured, you’re risking your funds by putting them in a situation where the value will fluctuate and can completely depreciate as well.
Luckily, your age allows you to make up for declining values with time. Unlike an older investor who is concerned with preserving capital, your number one focus can be on growing it. Losses are only blips on the radar screen over the long haul.
If you set your sights on the stock market but are still hesitant to invest much money, you can make small investments in $3 to $25 shares. This can give you a feel of how to manage your investment without bankrupting yourself in the process. You can employ the services of a reputable brokerage with reasonable fees to help manage your funds for you as well.
Regardless of your portfolio size, risk tolerance or strategy, it’s important to get your feet wet and begin investing. You won’t be faced with this high potential for growth for long.