You might have just started enjoying the freedom of getting a paycheck and would be tempted to spend it all on shopping, traveling and having fun. Studies show that many young Americans are careless with their finances. They do not save money, forget to pay their bills on time and do not bother about starting retirement funds. But remember that lack of investments and spending more than your income can be very harmful in the long run.
Compounded returns
It is important to invest a part of your salary instead of spending all of it. Most people think that they will save more later in their lives when their income is higher. But if you start saving from your 20s, then you will have to save much lesser when you have the responsibility of a family. This is because you get compounded returns on your savings – in other words, you get returns on returns. If you start investing later, your savings will grow much lesser than a person who started saving earlier.
Longer horizon nullifies fluctuations
Further, market conditions are becoming more and more volatile and unpredictable. But if you hold your investments for a longer time, you would not be affected too much by a slowdown in the economy, as these fluctuations get nullified in the long run. You also minimize risk as you have more time for correcting your investing mistakes.
Avoid stress later in life
When you invest early, you avoid unnecessary tension and pressure that comes from starting investments later in life. Further, you also ensure that you do not have to invest in high risk instruments at the time when you are approaching your retirement. If you do not save early, then you would need more returns on your investments in order to save enough money to last your post retirement life. You can get high returns only on investments that have higher risks associated with them.
You should start by figuring out how to start saving money by reducing your expenditure. It is much more important to get a clear idea about how to save than about how to invest. For long-term investment, target-date funds managed by mutual fund companies are a good option. These funds will change your portfolio according to your age – reducing the risk of the portfolio, as you grow older and closer to retirement age.
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