Financial Literacy for Young Adults: Tips for Beginning to Invest and Plan for the Future

As a young adult, it can be intimidating to begin investing and planning for the future. However, taking the time to understand personal finance can be incredibly beneficial in the long run. In this article, we'll cover some important concepts for beginning to invest, what to consider in the current environment, long-term vs. short-term views, how much salary may be needed for retirement, saving for a house, and the plusses and minuses of cryptocurrency as an investment.

Beginning to Invest

Investing can seem complicated, but it is critical for building wealth over time. One of the essential factors to consider when beginning to invest is your investment goals, which will depend on what you're saving for, such as retirement or a down payment on a house. Once you have your investment goals in mind, you can then determine your time horizon, which refers to how long you plan to hold your investments. Time horizon is crucial because it can determine the level of risk you can take on, with a longer time horizon allowing you to take on more risk.

There are some basic investing strategies to consider.

Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of the current market conditions. This can help smooth out the impact of market volatility on your investments over time, as you will be purchasing more shares when prices are low and fewer shares when prices are high.

Value averaging is similar to dollar-cost averaging except that investors invest more money when the account value drops.?For example, an investor may develop a goal so that the cumulative value of an investment account equals a total goal.?When the account balance drops below that goal balance, the investor invests more.?When it exceeds that goal balance, the investor invests less that month or designated period. That way more is invested when prices are low and less is invested when prices are high, but the investment goal is still achieved without market timing.

Market timing is an approach that has proved futile in the long run.?Many try to time the market, but the evidence is that no one can consistently time the market.?Failure to time the market accurately can lead to significant losses compared to a buy and hold strategy.?

There are modifications of these approaches.?For example, some people shift investments between sectors depending on the trends in the overall economy.?This is also difficult and is extremely risky for the average investor without help.

Stocks vs. Inflation

When investing, it's important to consider the effects of inflation, which can erode the value of your investments over time. Inflation is the rate at which the general level of prices for goods and services rises, resulting in a decrease in purchasing power. Historically, stocks have been one of the best options for outpacing inflation, with average returns that are higher than the rate of inflation. This is because stocks represent a share of ownership in a company that can increase in value over time, providing investors with a hedge against inflation.

Long-Term vs. Short-Term Views

Investing is a long-term game. It's important to have a long-term view and stay focused on your goals, rather than making decisions based on short-term market fluctuations. While short-term fluctuations in stock prices can be concerning, it's important to stay focused on your long-term investment goals, as the stock market tends to recover over time. If money is needed in the short-term, it is best to avoid the stock market.

The Benefits of Diversification

Diversification is the practice of spreading your investments across different asset classes and industries to reduce risk. It is a crucial aspect of successful investing, as it helps to mitigate the risk of losses in any one asset or sector. Investing in a mix of stocks, bonds, and other asset classes can help to provide a well-diversified portfolio that can weather different market conditions.?As a young person, if you see yourself having a long-time horizon, you may want to be very heavily invested in stocks.?For shorter term investing goals, you may want to be much more conservative (more money in investments such as bonds or money market accounts).?Some have found the envelope method useful for making asset allocation decisions.?They label an account or a set of investments as emergency fund, house down payment fund, retirement fund and so on and assign an investment allocation to each “fund.”?That way diversification is appropriately applied to each goal.

How Much Salary May Be Needed to Retire Well

It's essential to save for retirement as early as possible. A general rule of thumb is to save at least 15% of your salary for retirement, though the amount you need to save will depend on your lifestyle, retirement goals, and other factors. Saving consistently over time and taking advantage of employer-sponsored retirement plans, such as matching 401(k)s, can help you achieve your retirement savings goals.?If you don’t receive a match or don’t have a 401(k) at all, you may want to open a Roth IRA.

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars. The funds in your Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. This can be a great option if you expect to be in a higher tax bracket in retirement than you are currently.

A 401(k) is an employer-sponsored retirement plan that allows you to contribute pre-tax dollars, which can reduce your taxable income. Many employers also offer matching contributions, which can be a significant boost to your retirement savings. It's important to take advantage of any matching contributions offered by your employer, as it's essentially free money.

When deciding between a Roth IRA and a 401(k), it's important to consider your individual circumstances, such as your current tax bracket, retirement goals, and employer benefits. In general, it's a good idea to contribute as much as you can to your retirement accounts to take advantage of the tax benefits and help your savings grow over time.

Saving for a House

Saving for a house can be a significant financial goal. It's important to consider the total cost of homeownership, including the cost of the house, down payment, and closing costs when saving for a home. Additionally, owning a home comes with ongoing expenses like property taxes, maintenance, and repairs, which can impact your overall financial picture. It's important to budget for these expenses before committing to a mortgage.

Is a House a Good Investment?

Owning a home can be a good investment over the long term. However, it's important to consider the total cost of homeownership and the potential for home values to fluctuate. Additionally, owning a home can tie up a significant amount of money in a single asset, which can limit your investment diversification.?Home ownership comes with many costs that are commonly ignored.?Maintenance is a large cost as is home owners insurance and taxes that will increase over time.?The other factor in a home as an investment is that most people buy a home that is much nicer and larger than what they would rent, so a direct comparison to rent versus buy is often not down appropriately.?Whatever you decide about home ownership, you may want to get someone to help you make these calculations if you can’t do them yourself.

Pros and Cons of Cryptocurrency as an Investment

Cryptocurrencies like Bitcoin and Ethereum have been gaining popularity as investment options. However, they come with significant risks and should be approached with caution. Cryptocurrencies are highly volatile and can experience significant price swings in a short period. Additionally, there is a significant risk of fraud and theft. While some investors have made significant profits from cryptocurrency investments, it's important to consider these risks before investing.

Summary

In conclusion, financial literacy is an essential life skill that can help you plan for the future and build wealth over time. By beginning to invest early, considering long-term goals, and seeking professional advice when needed, you can make informed financial decisions that will benefit you in the long run.

DISCLAIMER:

Dollar Cost Averaging does not assure a profit and does not protect against loss in a declining market. Dollar Cost Averaging involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his ability to continue his purchases through through periods of low price levels. And then resubmit for final review and approval.

Nothing in this article should be construed as specific investment advice for your situation. Always make sure you understand your investments and work with a professional if you have any doubts about your ability to invest.