The world has changed a lot over the past several weeks. Many of us are feeling uncertain, anxious, and worried about the future. Some have lost jobs and income, others have lost friends and family members to this global pandemic. Young investors especially may be wondering how to seek to create future financial stability.
1. Spend less than you earn.
“The best financial secret I have ever heard is this: Spend less than you earn, and do it for a long time,” said Compass Financial Founder, Kurt Pearson. It sounds easy, right? But actually putting that advice into practice can be difficult. There will always be unlimited opportunities to spend limited resources. “My best advice for young people is to learn what works for you to manage the tension of cash flow management. If we don’t develop a method to pay ourselves first, we will never have money to invest,” Pearson said. Staying within your income is essential to being able to save for longer-term goals. So, work now to develop proper habits, techniques, and a good system for handling your money.
2. Prepare for an emergency.
Did anyone really see COVID-19 coming? Many picked their kids up from school before spring break and never expected they wouldn’t be coming back. The pandemic hit the United States and the effects were fast and furious: businesses were ordered to close, travel came to a sudden stop, and people had to find a way to work from home. It’s much easier to weather this kind of major financial disruption if you have a backup plan in the way of an emergency fund. Make it a goal to save six months’ worth of living expenses. Even when there’s not a global pandemic, there’s always something. A car breaks down, a home repair, an unforeseen medical expense. Start saving now for that unplanned expense later.
3. Don’t be afraid to invest.
There is an old quote that financial advisors often hear: “Now is always the hardest time to invest.” This is especially true now, when there is so much uncertainty in the world. “There are always other things you would rather put your money towards. Saving for a house, a new car, trips… Though these are not BAD things, it is also important to think about investing towards your future and retirement,” said Caleb Pearson, Compass Financial Services Owner and LPL Financial Advisor. “The sooner you start, the better off you will be down the road, even if it is just a little bit,” Pearson said. Justin Van Houten, LPL Financial Advisor, agreed. “The most valuable thing for young investors to understand is time is on their side. They have 40+ years for their money to work for them,” he said. “Time value of money (what a dollar today will be worth in the future) and the power of compounding interest will be the biggest drivers of their portfolio’s growth throughout their lives.” During times of market volatility, young investors are in a better position to weather the ups and downs because they are in it for the long haul.
4. Where to start?
Caleb Pearson advises his clients to consider several things when choosing investments, especially: time horizon, risk tolerance, and the return needed for your financial goals. “You need to consider how long until you will need the money, how much risk you can stomach, and what kind of return you are looking for. If you only need a 5% return to reach your goals, you may not need to take on as much risk,” Pearson said. For many young investors, the best place to start is with your company’s retirement plan. Start by putting in at least enough to get the full match from your employer, and add more if you are able. “If you start investing early and consistently contribute, compound interest will do the heavy lifting for you,” said Van Houten.
Kurt Pearson said young investors need to get into the habit of telling their money where to go. If not, the money will just leave! You worked hard for your money, so invest in yourself first. If you need help telling your money where to go, Compass Financial Advisors are here to help!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal.