According to an April 2015 report on CNBC, financial experts advise younger investors to receive some financial education before investing money. According to the budgetary gurus, it is best to pay off your credit card debt and maintain an emergency savings account before you invest as well. That way, you can cover any unexpected job loss or expenses. An emergency savings account, according to experts, should cover about three to six months of basic expenses.
Experts also advise that young people take full advantage of the benefits associated with tax-advantaged retirement accounts. Advisors suggest maxing out the retirement plan sponsored by your employer or your individual retirement account (IRA) before setting up a regular investment account.
According to budget planners, consumers should put their money into an employer retirement plan as employers often match whatever an employee invests. They add that taking advantage of an employer match is like receiving free money. Some of the popular retirement plans include 401(k)s, Roth IRAs and regular IRAs.
A Roth IRA allows investors to grow their savings tax-free while paying taxes on the contributions. On the other hand, if you take out a regular IRA, you are not taxed until you withdraw money. However, you won’t pay taxes the on annual gains. Before opening a regular investment account, though, make sure you are educated about saving on fees. That means choosing lower cost brokers like TD Ameritrade, Fidelity, Schwab or Vanguard to manage your investments.
In addition, financial investment specialists suggest that you put your money into passive funds that feature a low fee. That way you can keep your expenses down while diversifying your account. Choose either an exchange-traded fund (ETF) or passive mutual fund, both which give investors access to a wide range of stocks, bonds or similar assets. These kinds of funds replicate indexes, such as the Standard & Poor’s 500, and also feature lower expense ratios. Investors can reference a funds’ historical returns or expense ratios through their broker or on Morningstar.com.
Diversification, according to financial professionals, is the key to overall investment success. Stockholders should not only diversify within their funds but extend diversification to their entire portfolio. While the markets can be volatile, the stock market, historically, maintains a median annual return of around 6 to 8%. Millennials who invest as little as $50 per month have the opportunity of compounding and growing their money so they can retire well in about 30 years.