By Lee Sherman
They say you’re never too old to start investing for the future. But how about when you’re young? If you’ve somehow been lucky enough to acquire wealth at a young age, you’ll want to be sure to learn how to hold onto it, live off of it, and make it grow so you can build a legacy.
It doesn’t matter how you earned the money. Perhaps you were smart enough to start your own company and achieve a successful exit. Or, you may have inherited money. Athletes, musicians, and other celebrities may also achieve wealth at a young age. It may seem obvious that the earlier you start investing, the more potential you have to earn money over time. But unless you follow a few simple rules you can easily lose all the money you’ve earned.
Rule #1. Don’t squander the money on frivolous purchases, unsavory addictions, or even on spending money on others (ever heard of the old adage, pay yourself first?). Well, it applies double when it comes to saving for the future. Developing good financial habits when you’re young will mean that you are able to live in comfort for the rest of your life.
Rule #2. Start saving now. You’re young enough that even putting a small amount each month into a high-yield savings account with, let’s say a 1.30% Annual Percentage Yield (APY), can produce future dividends. While a savings account isn’t the most lucrative form of investment, it is the safest. Financial advisors recommend parking at least enough cash to live on for six months in order to ride out an emergency such as our current pandemic.
Rule #3. Play the numbers game. You’ll earn more from an investment account than you will from savings but remember that all investments come with a certain degree of risk. Your financial advisor can help you decide how much risk you can tolerate. What is the secret to lifetime wealth? Compound interest. Compound interest is the addition of interest to the principal sum of a loan or deposit. It’s interest on interest. Instead of receiving the amount of the interest right away, you allow that interest to be reinvested. That way the interest in the next period is earned on the principal sum plus the accumulated interest. If you play out this scenario to its logical conclusion, you can see how the earlier you start, the more money you will make over time.
Rule #4. Learn the differences between stocks, bonds, mutual funds, ETFs, and other kinds of financial vehicles. Financial advisors recommend a diversified portfolio, with some money invested in each. How you weight your portfolio will depend upon your risk tolerance. Although, you may be tempted to invest in one kind of investment vehicle only, it isn’t generally recommended. And if your wealth is tied to your former company’s stock, it’s a good idea to divest it, even if it pains you.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.