A young age is the best time to save and invest money for a variety of reasons. First, by investing at a young age, you develop an emergency cash fund, which you can tap into for the inevitable rainy-day emergency. Second, young investors learn the financial world at an early age and develop sound savings habits. But most of all, if you save and invest at a young age, you enjoy the benefit of what Albert Einstein described as the most powerful force in the universe: compound interest. The earlier you save and invest money, the faster the money will grow into a healthy savings that can be used for the purchase of a home, a child’s education, retirement or other major life events.
Enroll in whatever retirement plan your employer offers and arrange for automatic pretax contributions from each paycheck. Contribute as high a percentage as the plan allows, or at least up to the maximum percentage level at which the employer matches contributions.
Open a savings account with a local bank or, preferably, with a high-interest savings account online. Set up an automatic transfer so that some portion of each paycheck goes directly into the account without you ever seeing the money.
Invest in a reputable no-load mutual fund that tracks the performance of the S&P 500, once your total savings grow sufficiently to cover the minimum purchase amount (typically $2,500 to $3,000).
Arrange for automatic deposits directly to the mutual fund account on a monthly basis.
As total savings grow, consider other mutual funds that track the performance of certain market segments, such as real estate, health care or energy.
Tips & Warnings
- The key to successful investing is dollar cost averaging, which requires consistent, faithful contributions to investment accounts, year in and year out. Continue to invest monthly contributions through good times and bad. Do so regardless of the experts’ market predictions and regardless of recent trends in the market.
- If your employer does not offer a retirement plan, open a Roth IRA. This powerful investment vehicle allows individuals to contribute after-tax dollars to an investment fund without paying taxes, on either the principal contribution or investment earnings, ever again.
- While investing in employer-sponsored retirement accounts should be a priority, realize that these funds cannot be withdrawn before retirement age without paying a substantial penalty. It is therefore important to maintain some savings in a non-retirement account for access in cases of emergencies.
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