START INVESTING AS A TEENAGER
You are never too young/under-age to start saving and investing. In fact, starting early has two distinct benefits. Saving and investing from a young age can become habits that will last a lifetime. Also, the earlier you start and the more times you add money to your savings, the faster they will grow over time. While there are many ways to build wealth in New Zealand, there are three main components: time, frequency, and compounding.
Learn the basics
1 Start early. Time is perhaps the most important element in saving and investing. The more time you save and invest, the more likely you are to reach your goals and have considerable wealth.
•You can save or invest more money over a long period of time than a short one. Yes, this seems obvious, but many people do not fully appreciate how powerful the effect of time is in the accumulation of wealth.
•For example, if you can afford to save $ 50 per month, starting at age 13 (assuming someone takes care of your money for you), by the time you are 65 you will have saved about $ 36,000 ($ 50 x 12 months x 52 years = $ 31,200). What’s more, that amount does not include the interest you will have earned. If you start saving at age 50, you would have to save $ 175 a month in order to reach the same amount ($ 36,000) when you are 65.
•If your investments have setbacks along the way, you will have time to recover if you start early, as opposed to if you start late. Investments (ie stocks, bonds, commodities, precious metals, etc.) sometimes work and sometimes don’t. Other times, they even lose value. In the short word, they can be a problem. However, in the long term, the impact is less severe. Time allows your investments to recover in value. In other words, typical investments always gain value if you give them enough time.
2 Add money to your savings on a regular basis. The frequency of your contributions (for example, weekly, monthly, or yearly) has a major impact on your long-term success. There are three reasons for this:
•First, investing more often means you can add less money each time. This can make things easier. In the example above, if you start at age 13, you can save $ 12.50 per week. Alternatively, you can save $ 50 per month or $ 600 per year. In each case, the money you add to your savings is the same. However, it is easier to save smaller amounts but more often.
•The second benefit refers to capitalization, which will be discussed in detail below. Compounding will make your savings grow faster, like a snowball rolling downhill. The longer it circulate, the more it grows. Compounding costs nothing, it just works faster depending on how often you add money to your savings.
•The third benefit is the average cost. The idea here is that the prices of your investments go up and down several times. However, over time they will tend to go upwards. This is true regardless of what you invest in (for example, savings accounts, bonds, stocks, gold, silver, etc.). When you invest consistently, you tend to lower the average cost of your investments. This ultimately translates to more money saved. Economics experts have shown it to be true.
3 Let your wealth grow. Compounding is the effect of multiplying income on income. The basic idea is that you should reinvest the interest or dividends on your earned investments. In this way, you will get a new interest from the initial interest. When you repeat this cycle over and over again over the years, your original investment will grow at an amazing rate!
•Frequency and time are also important. A higher compounding frequency means you receive and reinvest your earnings more often. The more times this happens and the longer you let it continue, the more powerful the effect will be. The more often you invest, the longer you allow compounding to do the work for you.
•For example, let’s say that at age 25 you start saving $ 100 per month and earn 6% interest. At age 65, you will have invested $ 48,000. However, that money will actually grow to $ 200,000 if you let the interest accumulate over that 40-year period.
•In contrast, let’s say you wait until your 40s to start saving, but decide to save $ 200 a month. At age 65, you will have invested $ 60,000. However, you won’t have as much time for your interest to multiply. The result you will get will be the sum of $ 140,000 saved for your retirement (instead of $ 200,000, as in the previous example). You will have saved more money, but you will end up with less after compounding.
Understand your savings and investment options
1 Use a savings account. A savings account gives you access to your money at any time without any risk. However, this option offers a lower interest rate or return on your investment. “Payback” simply means the amount of money you earn over and above your original investment. A certificate of deposit (CD) offers a slightly better return, but with less flexibility. You must leave the money in the bank for a period of time that ranges from months to years.
•The benefits of these options are many. They are easy to organize, they are free, and they are usually insured by a government agency, which means they are quite safe.
•The downside is that these options pay very little interest. Therefore, compounding has little effect on these accounts. For this reason, certificates of deposit and savings accounts are suitable only for holding small amounts of money for very short periods of time. They only improve as savings vehicles in times of high interest rates.
•Smaller banks and credit unions sometimes offer higher interest rates in order to prevent clients from preferring larger institutions
2 Invest in government bonds. When you buy these bonds, what you do is loan money to a government or a government agency. You can also invest in corporate (non-government) bonds. Like a certificate of deposit, you will have to leave this money invested for a period of time (usually one or more years).
•There are many benefits to investing in bonds. They are easy to understand, guarantee payments at a set rate, etc. This means that you can reinvest your earnings and let compounding do the work for you in a predictable way. Government bonds are guaranteed, so the risk is low.
•You can buy government bonds at most banks. You can also buy some types of bonds online. This makes them easier to acquire.
•There are also some downsides. When interest rates are low, the payoffs can be small. Even in times of higher rates, bonds tend to offer lower returns than stocks (however, they are generally considered less risky).
•The average yield on bonds since 1928 (including compounding) is 6.7% per year, compared to 10% for stocks.
3 Invest in a mutual fund. Mutual funds are pools of stocks or bonds that people invest in as a group. Earnings come from interest or dividends paid on fund holdings, as well as changes in their value.
•There are many benefits to mutual funds. These accounts are easy to create and maintain. A fund’s staff will do all the work for you for a fee. They will make it easy to add money to your investment on a regular basis and reinvest in your earnings, both very good strategies, as mentioned above.
•Mutual funds also allow you to invest in a variety of stocks and bonds. This provides the security of diversity, protecting you against losing money when stocks fall in value.
•You will have to take a look at several funds in order to choose one (or a few) that allows you to invest with a small initial amount and add small periodic investments. If you don’t have a lot to invest, this is important. Some funds allow you to start with a minimum of $ 1,000 and add increments of a minimum of $ 50 or $ 100.
Warnings
Don’t invest more than you can afford to lose in stocks. The nature of the stock market is that you can lose all or part of your investment even if it offers the possibility of large returns.
Conclusion
• If all of the tips above fail to impress you much, it is probably because you are too young to care. In that case, talk to a family member or older friend. That person can give you some perspective and motivation to start thinking about the future of your life. As you get older, you will find that accumulating money for your retirement years will be much more important to you. Why start early in the process? It will make your life so much easier as you get older.
•Once you start working, a good goal for saving and investing is 10% of each paycheck. This is enough to grow your savings fairly quickly but not so much that it slows down other areas of your life. Don’t wait until the end of your pay period to invest. Do it on payday. If you wait, you will realize that there is nothing left to invest. Instead, “pay yourself” first and either manage the amount you spend, or better yet, manage the amount you spend.
•If you have trouble saving, create a budget. Let it reflect your intention to pay yourself first.
•Don’t stop studying. Get a high school diploma and then a college degree. Lifetime income increases dramatically with education. The more you earn, the more abilities to save and invest you will have.
•In general, you should use the “savings” for your short-term projects. “Investing” is a long-term project. Try to do both. Investing is what is going to yield you long-term benefits.
•The more time you have to reach your goals, the more likely you are to make high-risk investments. These are the ones that will pay off the most in the long run. When you have a short time horizon before you have access to your money, trust your savings and your certificates of deposits.
•It’s a good idea to establish an early relationship with an accountant. Accountants can help you prepare your tax return. They can also keep track of all your finances and make sure you are investing well.
•Review your investments, your income, and your earned interest after a while. Do this periodically as you get older and contribute more.