As long as you have time, you can start investing today. Time is the fuel behind every successful investment. It goes without saying: the more years you can invest into investing, the better.
Investing helps your money grow over time because of the effects of compounding interest. Not only that but you can earn dividends, interest income and/or capital appreciation.
Most people know investing can help their money make more money. The disconnect is that most people aren’t clear on how to invest based on their age. Two different investment strategies should be used for an individual who is 30 and another who is 50. Both individuals have the opportunity to benefit from investing, however, they typically would not have the same investment strategy.
There are literally thousands of different investments you can buy. It is nearly impossible to research and know them all (which honestly would be overwhelming). But the very first step in turning your first vested dollar into $1 million, is making the decision to start investing.
While everyone should seek financial advisory services before making any investment decisions, there are a few pointers to keep in mind while investing, which are largely based on age.
General First Steps Before Investing
Set financial goals
What do you want to accomplish with your money? Consider short and long-term goals. Maybe you want to pay off some debt or accumulate more wealth. Whatever it is, think about your short and long-term goals.
Investing towards retirement should always be included as a financial goal. After all, most people would prefer not to have to work in their 70’s and 80’s.
Fund an emergency account
We can’t always plan for the events that happen in our everyday lives. Emergency situations always seem to pop up at the most inconvenient times. However, the stress of an emergency can be mitigated if you’re financially prepared.
A good emergency fund is one that has at least 6 months of living expenses saved.
Investing in your 20’s
Investing in your 20’s can be a really exciting time. You are done with school and have started working in your career field. Without a doubt, it is the most optimal time to start investing because of the decades of investing you have ahead of you.
Invest in yourself
Before delving deep into what you should invest in, let’s talk about who. Your 20s are an optimal time to invest in yourself. Studies repeatedly show that college graduates earn over $1,000,000 in their lifetime than those who do not graduate. Acquiring an advanced degree is just one way you can invest in yourself. You could also learn new work skills that would demand a higher pay. If you could increase the value of your skills and/or education, you will have more available resources to invest.
Invest in stocks
Stock investments are considered “more” risky than bond and cash investments because of their unpredictability. However, over the long term, the stock market has increased in value and has shown to be more lucrative than bond and cash investments.
As a 20-something, if you can stomach more risk associated with investing, you should focus more on stock investments. It’s wiser to be more “risky” now than later in life because you have time to recuperate losses.
Besides investing in stock portfolios, take full advantage of your employer’s 401k benefits. A lot of companies match a percentage of employee contributions. Aka free money!
Investing in your 30’s
In your 30s, you have about 30+ years until traditional retirement. Giving you plenty of time to get the investment ball rolling.
In your 30s, you probably have experienced life changes since being in your 20s. For example, maybe you’re married, have kids, a mortgage, or graduated from college. You should consider all of these factors when starting to invest.
Your 30s should be highly focused on your retirement. If you didn’t start in your 20s, start now! One of the smartest and easiest investment moves you can make is participating in an employer-sponsored retirement plan.
Some employer sponsored retirement plans include:
- Defined Benefit Pension Plan
- 401(k) Plan
- 403(b) Plan
- 457 Plan
- SEP Plan
The type of retirement plan mostly depends on the type of company you work for. For example, 403(b) plans are specifically designed for nonprofit organizations, like school systems or hospitals.
Regardless of the type of plan offered, your 30s is a great time to take full advantage of employer-sponsored retirement plan. In most instances, your employer will contribute to your retirement plan too which makes this mode of investment even more compounded.
Because time is on your side, you can recover from losses in a timely manner. Meaning you can afford to take higher risk investments and benefit from them. Individual stocks are an example of investments that have high risk but the potential for high returns. Consider including these types of investments in your portfolio.
Investing in your 40’s
Starting to invest in your 40’s presents some good news and bad news. The only bad news is that you lost out on some valuable years your portfolio could have been earning returns. The good news is you finally caught on to the importance of investing and have a solid amount of time to reap the benefits.
If you are new to the investing game in your 40s, retirement should be your top priority. Participate in your employer-sponsored retirement plan. Contribute as many funds as possible or at least the maximum contribution your employer is willing to match you at.
Open a secondary retirement fund like a traditional or Roth IRA. The main difference between the 2 is when your contributions are taxed. Traditional IRA contributions are tax-deductible and distributions are taxed. Roth IRA contributions are made with after-tax monies, but distributions are not taxed.
Investments in your 40s should be more conservative than that of your 20s and 30s. Your portfolio should consist of a higher allocation of bond investments because of their relative stability. Depending on your investing style, you may feel more comfortable investing more into stock. Just keep in mind, that stocks are more volatile than other types of investments.
Investing in your 50’s
Starting your investment journey in your 50’s can be intimidating. But don’t let feelings of fear or regret overshadow your investment possibilities. For all you know, you could live another 50 years and the decisions you make now will dictate your financial freedom and comfort.
In addition to maximizing your employer-sponsored retirement contributions and supplemental IRAs, start making “catch-up” contributions. These retirement accounts allow investors 50 and over to make additional catch up contributions over the normal limit. For example, 401k accounts allow you to contribute an extra $6,000 annually. IRA accounts allow you to contribute an extra $1,000 annually.
It is important to play it safer in your 50’s. Opt to invest more in bonds and cash investments.
Moral of the story
How and when you decide to invest is 100% dictated by you, the investor. Always make decisions with you and your family in mind to achieve the most rewarding results. Investing towards retirement is one of the most necessary and responsible actions you can take. Approach each decade as an opportunity to drive more earnings in your portfolio. Just remember, with each passing decade, you have less wiggle room to invest towards retirement and achieve other financial goals.