START BUILDING WEALTH WHEN YOU ARE YOUNG
Forever young,
I want to be forever young
Do you really want to live forever?
Forever young. – Alphaville
When you are young it’s difficult to think about the future. If 5-10 years may seem like an eternity it’s hard to blame 20 something’s for not thinking about 30-40 years down the road. For my regular readers it may seem like I am some kind of mission to get young adults to invest. Last week I spoke about how newly married couples should learn proper financial habits from the get-go, so that once the expenses of a family start piling up, they will have developed good financial habits. This week I want to focus on the importance of investing earlier rather than later, and how you will be doing yourself a huge favor if you start investing now, as opposed to waiting until you are 45-50 and then need to scramble to play retirement catch-up.
Don’t wait
“The stock-market is trading near all-time highs and I don’t make a huge salary. Why should I risk losing my money by investing?” This is a frequent question that I hear from young people.
People delay long-term saving because they don’t really understand investing, and they are struggling to become established on a career track. Unfortunately the dirty little secret is that delaying retirement investing is a mistake. There is a lot of data in the U.S. that workers in their 50’s have only managed to save $50,000 for retirement. That’s not going to get them very far once they stop working. Ask these people what their one financial regret is and I am sure that they will answer that they started saving far too late in life.
Afraid the market is going to crash? The most important aspect to build wealth is to start a consistent savings plan. Pay yourself first as financial planners say. Early on, saving money has more impact than your investment return. This is due to the fact that your nest egg isn’t very large yet, and market swings have only a minimal impact on the total valuation. For example, if you have $7,000 in your account and the market drops 10%, your portfolio value will decrease by $700. However, if you save $500 a month, your portfolio balance would be less than 3% less.
Keep in mind that the stock market doesn’t fluctuate that much and your monthly contribution will usually be more than any swing in the market. It will take some time before your investment return will severely impact your portfolio more than you increase your net worth from the contributions.
Market drops are good?
No one likes when the stock market drops but for young investors there is a silver lining to a falling market. Yes the stock market is at an all-time high, and it can be unnerving to jump in. But even if the market goes through a correction, you will benefit over the long-term. By saving money every month, you are dollar-cost averaging in. When the market declines, you’re buying more shares at a cheaper price. Historically, the stock market does very well over the long term, so picking up shares cheaply can be a big benefit.
Getting Started
Many young people put their savings in the bank, where it makes zero interest. How will they be able to afford paying for their children’s weddings in 20 years’ time if their savings do not grow? Get your money to work for you now. Either go online and research how to start investing, or speak to a financial advisor who can help you draw up a long-term investing plan.
Increase your chance for financial success, and start building your wealth now. You will thank yourself for that decision in a few decades!
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
