Hands down the best time to begin your journey towards investment success is very early in your adult life. I realize that at this point in your life it seems like you have all the time in the world to begin your investment program, but time has a way of getting away from all of us, so start now and begin to reap the rewards of an early start.
Some of the advantages to starting early and especially if you are still living at home is the amount of disposable income you will produce. I realize the urge to spend this disposable income and by all means do not deprive yourself of the joy of spending money, but set up a systematic savings program as well.
If you are working I would suggest you enroll in your companies 401K program as soon as possible and should your plan offer some type of company match on your contributions then make sure you max out your plan every year in order to take advantage of what amounts to free money on your behalf. Not only will this be free money, but by your company making part of your contributions it will free up more of your money you have allocated towards savings. This will allow you to begin investing after tax dollars, which will be outside of your 401K and although you lose the advantage of your money growing tax deferred you do gain a psychological advantage that I will talk about next.
My next point is where I part ways with most of the so called financial experts. The experts will have you believe that you should contribute to you 401K until it hurts and in a way they are correct, but not very realistic. My suggestion is that once you come up with an amount to contribute to your 401K, take 30% of that amount and invest it in an after tax account. My reasoning for this is very simple. It is realistic to expect humans to contribute to an investment plan that they will not reap the rewards of for 35, 40 or 45 years. There will come a point and especially in the young, that they will cut down or even stop contributing altogether simply because their time frame is to long and they figure to make up the short fall into the future.
Now, if you take 30% of the allocation you had set aside for your 401k and invest it in stocks, bonds, mutual funds, whatever investment you find prudent at the time and you do this in an after tax account, some amazing things begin to happen. First of all, the money need not be sheltered for what seems like a lifetime and a half and is for that matter. This alone will allow you to actually have access to these funds that you are growing and this feeling alone will really make you want to contribute more. Secondly, it allows you to reward yourself, perhaps on a quarterly basis for the due diligence of sticking to your investment goals. Take 10 or 15% of what you have amassed in your after tax account and purchase something that you really want. The great thing about this, is that you will get gratification from saving on a pretty regular basis and as your account grows that 10% becomes a bigger and bigger chunk of change.
This line of allocating your investment dollars will in the long term, keep you focused and if all goes well it will motivate you to save even more.
One more point of interest before I close Part One of Investment Advice for the Young. Pick up a very small book called “The Richest Man In Babylon” and follow the simple common sense advice it gives. The results will astonish you over time.
In all honesty, none of these financial principles are very hard and with a little common sense and discipline you can master the vast majority of your financial tasks at hand, the hardest being stock selection and this I will cover in Part 2.
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