In a bid to empower young, single mothers with essential life skills, a life-skills program has included a class on financial management. As part of this program, a series of tips, tricks, and hacks have been compiled to help young individuals gain control over their spending and saving habits. This month, the focus is on providing novice investors with the best strategies to navigate the complex world of investments.
Before delving into the stock market, it is crucial to assess one’s overall financial situation. Establishing an emergency fund that can cover at least three to six months’ worth of expenses is a recommended first step. This fund should be kept in a secure location, such as a bank account or money market fund, for easy access in case of emergencies. Additionally, money set aside for short-term goals, like vacations or down payments, should not be subjected to investment risks. Prioritizing the repayment of high-interest-rate debts is also essential, as it is equivalent to earning a high return on investment.
However, for long-term goals, particularly retirement, the stock market presents an opportunity for growth. The younger an individual is, the more they should consider investing in stocks to leverage their greatest asset: time. Following four fundamental steps can pave the way to investment success: starting early, starting small, investing consistently, and keeping it simple.
The first strategy for novice investors is to take advantage of workplace retirement plans, such as a 401(k). These plans offer several advantages, including automatic enrollment, employer matching contributions, and the ability to adjust contributions based on affordability. Even starting with small amounts, like $50 or $100 per month, can set individuals on the path to financial security. For those without access to a workplace retirement plan, opening an Individual Retirement Account (IRA) can serve the same purpose.
Spreading the risk is another crucial aspect of investment strategy. Workplace retirement plans simplify this process by offering investment options that cover the entire U.S. stock market. Investing in index funds, such as the Vanguard Total Stock Market Index Fund (VTSMX), allows novice investors to diversify their portfolios and potentially benefit from the market’s historical 10% annual return. Target-date retirement funds, available within retirement accounts, automatically allocate investments based on an individual’s age and years until retirement.
While branching out into other investments or opening accounts outside retirement plans is possible, it is important not to be swayed by market trends or fads. The ultimate goal should be to secure one’s financial future, enabling individuals to use their money as they choose.