Irish playwright George Bernard Shaw claimed that youth was wasted on the young. When it comes to finances, whether or not a young investor appreciates the advantages of having logged fewer years on planet earth is irrelevant. What matters is that a savvy twenty-something can build a substantially larger portfolio over time simply on the basis of recognizing his youth and allowing that to dictate an investment strategy.?Here are three reasons it?s great to be young.
Take More risks!
Don?t interpret this to mean that you should put every last nickel to your name in a penny stock company founded by Bernie Madoff?s secret cousin, because we?re not saying that. What we are saying is that an investor in his or her mid 20?s has, theoretically, about 40 years until retirement. When you don?t need to touch your money for four decades, it affords the luxury of being able to create a portfolio with a slightly riskier mix of assets. Normal market volatility should not be as much of a factor because you have time to recover from a sharp downtown.
Compounding Really is a Miracle
We?ve said it before and we?re never going to stop saying it. The miracle of compound interest is the single greatest financial tool/strategy ever invented. You could be an absolute moron in every other aspect of your life, but if you simply contribute $5,000 every year (beginning at age 25) to an IRA that earns, on average, 7 percent annually, you will arrive at age 70 with more than $1.5 million waiting for you. Start at age 35 and the age 70 lump sum drops to about $800,000. Put off investing until age 40 and you?re looking at $546, 891. The lesson here is threefold:
- Start investing early
- Be regular
- Reap the fruits of your wisdom with a more awesome retirement lifestyle
Create a Financial Plan
The truth is you probably won?t reach your financial goals by simply wandering through life. You?ve got to create a plan that includes:
1. Contributing enough to receive any employer matching 401(k) contributions that might be available.
2. Getting rid of high-interest debt ? anything above 9 percent is killing you economically. It might even be a good idea to extinguish the higher interest rate debt with extra savings.
3. Contributing the maximum amount to your workplace 401(k) and then looking into opening a personal IRA like a Roth.
Last but not least, set up automatic investment plans to reach other financial goals.?While working your way through these three steps, don?t forget to tell George Bernard Shaw to stick his words where the sun don?t shine. While youth may or may not be wasted on the young, fewer candles on the birthday cake could mean much more money down the road.?(Top image: Flickr | Heisenberg Media)
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The Young Wealth Team